1
FINANCIAL INFORMATION
Consolidated Financial Statements
of Sterling Bancorp and Subsidiaries 18
Consolidated Statements of Condition
of Sterling National Bank 22
Notes to Consolidated Financial Statements 23
Independent Auditors' Report 47
Management's Discussion and
Analysis of Financial Condition and
Results of Operations 48
CORPORATE DIRECTORIES
Sterling Bancorp and Subsidiaries 62
2
STERLING BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 40,065,863 $ 54,512,462
Interest-bearing deposits with other banks 3,010,000 3,010,000
Federal funds sold -- 3,000,000
Securities available for sale (at estimated market value) 148,921,006 77,597,117
Securities held to maturity (estimated market value
$236,009,925 and $223,668,650, respectively) 236,030,004 226,733,888
-------------------------------
Total investment securities 384,951,010 304,331,005
-------------------------------
Loans, net of unearned discounts 558,481,845 465,516,556
Less allowance for loan losses 8,677,610 8,003,392
-------------------------------
Loans, net 549,804,235 457,513,164
-------------------------------
Customers' liability under acceptances 1,125,654 613,430
Excess cost over equity in net assets of the banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 7,330,062 5,508,740
Accrued interest receivable 4,147,008 4,257,142
Other assets 8,387,386 7,700,928
-------------------------------
$1,019,979,658 $ 861,605,311
===============================
Liabilities and Shareholders' Equity
Noninterest-bearing deposits $ 312,461,489 $ 229,976,783
Interest-bearing deposits 418,946,491 344,445,578
-------------------------------
Total deposits 731,407,980 574,422,361
Federal funds purchased and securities sold under agreements to repurchase 106,752,546 88,144,400
Commercial paper 24,070,600 32,569,900
Other short-term borrowings 19,891,252 30,419,791
Acceptances outstanding 1,125,654 613,430
Due to factoring clients 30,798,610 23,140,504
Accrued expenses and other liabilities 11,560,450 14,228,490
Long-term convertible subordinated debentures -- 6,389,000
Other long-term borrowings--FHLB 1,750,000 14,500,000
-------------------------------
Total liabilities 927,357,092 784,427,876
-------------------------------
Commitments and contingent liabilities
Shareholders' Equity
Preferred stock, $5 par value ($20 liquidation value) 2,486,730 2,506,600
Common stock, $1 par value. Authorized 20,000,000 shares;
issued 8,262,500 and 7,725,533 shares, respectively 8,262,500 7,725,533
Capital surplus 44,775,759 38,619,434
Retained earnings 39,590,806 31,648,806
Net unrealized appreciation on securities available for sale, net of tax 197,374 90,001
-------------------------------
95,313,169 80,590,374
Less
Common stock in treasury at cost, 44,593 and 42,343 shares respectively 441,257 418,959
Unearned compensation 2,249,346 2,993,980
-------------------------------
Total shareholders' equity 92,622,566 77,177,435
-------------------------------
$1,019,979,658 $ 861,605,311
===============================
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
Interest Income
Loans $ 46,783,503 $ 39,221,330 $ 32,725,860
Deposits with other banks 225,051 156,922 183,230
Investment securities
Available for sale 4,543,430 6,296,121 4,689,687
Held to maturity 15,903,348 15,034,267 15,350,549
Federal funds sold 370,741 288,388 534,255
-------------------------------------------
Total interest income 67,826,073 60,997,028 53,483,581
-------------------------------------------
Interest Expense
Deposits 14,943,623 12,108,336 11,540,344
Federal funds purchased and securities sold under
agreements to repurchase 4,480,085 4,611,205 2,967,516
Commercial paper 1,298,916 1,546,997 1,176,269
Other short-term borrowings 656,570 1,041,821 316,192
Long-term convertible subordinated debentures 250,060 1,144,261 2,234,786
Other long-term borrowings--FHLB 624,939 881,137 1,083,911
-------------------------------------------
Total interest expense 22,254,193 21,333,757 19,319,018
-------------------------------------------
Net interest income 45,571,880 39,663,271 34,164,563
Provision for loan losses 3,075,000 2,047,005 1,866,000
-------------------------------------------
Net interest income after provision for loan losses 42,496,880 37,616,266 32,298,563
-------------------------------------------
Noninterest Income
Factoring commissions 3,988,254 3,432,977 1,650,761
Mortgage banking income 3,289,442 1,473,644 59,782
Service charges on deposit accounts 2,049,839 1,829,784 1,684,300
Commissions on letters of credit 929,970 828,004 741,189
Net securities (losses)/gains -- (71,254) 4,801
Other income 2,714,424 2,415,310 1,837,378
-------------------------------------------
Total noninterest income 12,971,929 9,908,465 5,978,211
-------------------------------------------
Noninterest Expenses
Salaries 17,151,370 14,859,118 11,116,147
Employee benefits 3,401,063 3,217,794 2,654,956
-------------------------------------------
Total personnel expense 20,552,433 18,076,912 13,771,103
Occupancy expense, net 3,084,946 2,504,624 3,380,095
Equipment expense 2,389,691 1,689,291 1,795,052
Other expenses 9,679,249 9,426,552 7,714,006
-------------------------------------------
Total noninterest expenses 35,706,319 31,697,379 26,660,256
-------------------------------------------
Income before income taxes 19,762,490 15,827,352 11,616,518
Provision for income taxes 8,874,087 7,575,498 5,978,852
-------------------------------------------
Net income $ 10,888,403 $ 8,251,854 $ 5,637,666
===========================================
Average number of common shares outstanding
Basic 7,874,653 7,015,185 6,346,396
Diluted 8,623,879 8,702,144 8,823,618
Earnings per common share
Basic $ 1.38 $ 1.17 $ .89
Diluted 1.27 1.01 .77
Dividends per common share .37 .31 .25
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
Preferred Stock
Balance at beginning of year $ 2,506,600 $ 2,525,760 $ 1,650,760
Conversions of Series B and Series D shares (19,870) (19,160) --
Market value guarantee feature -- -- 875,000
--------------------------------------------
Balance at end of year $ 2,486,730 $ 2,506,600 $ 2,525,760
============================================
Common Stock
Balance at beginning of year $ 7,725,533 $ 6,496,854 $ 6,496,605
Conversions of subordinated debentures 519,480 1,133,084 249
Conversions of preferred shares into common shares 1,987 1,916 --
Options exercised 15,500 1,500 --
Common shares issued in acquisition of mortgage company -- 92,179 --
--------------------------------------------
Balance at end of year $ 8,262,500 $ 7,725,533 $ 6,496,854
============================================
Capital Surplus
Balance at beginning of year $ 38,619,434 $ 28,091,878 $ 28,089,137
Conversions of subordinated debentures 5,975,019 10,050,401 2,741
Conversions of preferred shares into common shares 17,883 17,244 --
Options exercised 169,250 9,375 --
Common shares issued in acquisition of mortgage company -- 170,816 --
Issuance of shares under incentive compensation plan -- 286,195 --
Forfeiture of shares issued under incentive compensation plan (5,827) (6,475) --
--------------------------------------------
Balance at end of year $ 44,775,759 $ 38,619,434 $ 28,091,878
============================================
Retained Earnings
Balance at beginning of year $ 31,648,806 $ 25,641,804 $ 21,592,244
Net income 10,888,403 8,251,854 5,637,666
Cash dividends paid--common shares (2,900,466) (2,223,721) (1,586,603)
--preferred shares (45,937) (21,131) (1,503)
--------------------------------------------
Balance at end of year $ 39,590,806 $ 31,648,806 $ 25,641,804
============================================
Net Unrealized Appreciation (Depreciation)
On Securities Available For Sale, Net of Tax
Balance at beginning of year $ 90,001 $ 543,747 $ (1,140,969)
Change in valuation account for securities available for sale, net of tax 107,373 (453,746) 1,502,081
Net unrealized gain on securities transferred from held to maturity
to available for sale, net of tax -- -- 182,635
--------------------------------------------
Balance at end of year $ 197,374 $ 90,001 $ 543,747
============================================
Treasury Stock
Balance at beginning of year $ (418,959) $ (1,489,239) $ (1,489,239)
Issuance of shares under incentive compensation plan -- 1,095,055 --
Forfeiture of shares issued under incentive compensation plan (22,298) (24,775) --
--------------------------------------------
Balance at end of year $ (441,257) $ (418,959) $ (1,489,239)
============================================
Unearned Compensation
Balance at beginning of year $ (2,993,980) $ (2,153,580) $ (1,479,224)
Issuance of shares under incentive compensation plan -- (1,381,250) --
Forfeiture of shares issued under incentive compensation plan 28,125 31,250 --
Amortization of unearned compensation 716,509 509,600 122,150
Market value guarantee feature--unallocated shares -- -- (796,506)
--------------------------------------------
Balance at end of year $ (2,249,346) $ (2,993,980) $ (2,153,580)
============================================
Total Shareholders' Equity
Balance at beginning of year $ 77,177,435 $ 59,657,224 $ 53,719,314
Net changes during the year 15,445,131 17,520,211 5,937,910
--------------------------------------------
Balance at end of year $ 92,622,566 $ 77,177,435 $ 59,657,224
============================================
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 10,888,403 $ 8,251,854 $ 5,637,666
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 3,075,000 2,047,005 1,866,000
Depreciation and amortization of premises and equipment 1,465,620 946,233 1,405,813
Deferred income tax (benefit) provision (854,612) 32,920 (877,554)
Net change in loans held for sale (3,846,158) (5,591,000) (419,000)
Net securities losses (gains) -- 71,254 (4,801)
Amortization of unearned compensation 716,509 509,600 122,150
Amortization of premiums on investment securities 1,357,973 1,666,602 1,494,661
Accretion of discounts on investment securities (150,942) (157,134) (137,407)
Decrease (Increase) in accrued interest receivable 110,134 (105,192) (166,660)
Increase in due to factoring clients 7,658,106 544,325 11,213,858
(Decrease) Increase in accrued expenses and other liabilities (2,015,388) (3,153,196) 8,626,554
Other, net (2,870,171) (2,243,502) 1,047,443
-----------------------------------------------
Net cash provided by operating activities 15,534,474 2,819,769 29,808,723
-----------------------------------------------
Investing Activities
Purchase of premises and equipment (3,286,942) (3,458,873) (715,598)
Net increase in interest-bearing deposits with other banks -- (10,000) (30,000)
Decrease in Federal funds sold 3,000,000 2,000,000 3,000,000
Net increase in loans (89,119,131) (61,863,478) (84,790,432)
Proceeds from prepayments, redemptions or maturities of
securities--held to maturity 39,933,896 40,548,751 31,047,989
Purchases of securities--held to maturity (50,284,272) (70,755,029) (20,534,657)
Proceeds from sale of securities--available for sale -- 15,387,010 8,977,432
Proceeds from prepayments, redemptions or maturities--
available for sale 30,680,545 13,390,375 5,734,390
Purchases of securities--available for sale (101,959,442) (6,083,161) (10,918,982)
-----------------------------------------------
Net cash used in investing activities (171,035,346) (70,844,405) (68,229,858)
-----------------------------------------------
Financing Activities
Net increase in noninterest-bearing deposits 82,484,706 5,896,240 49,183,400
Net increase (decrease) in interest-bearing deposits 74,500,913 17,498,318 (15,458,112)
Net increase in securities sold under agreements to repurchase 608,146 29,878,780 7,214,784
Net (decrease) increase in commercial paper and other
short-term borrowings (19,027,839) 31,050,851 10,161,816
Prepayments and maturities of debentures -- (3,773,515) (5,097,010)
Decrease in other long-term borrowings--FHLB (12,750,000) (3,500,000) (4,500,000)
Increase in Federal funds purchased 18,000,000 7,000,000 --
Proceeds from exercise of stock options 184,750 10,875 --
Cash dividends paid on preferred and common shares (2,946,403) (2,244,852) (1,588,106)
-----------------------------------------------
Net cash provided by financing activities 141,054,273 81,816,697 39,916,772
-----------------------------------------------
Net (decrease) increase in cash and due from banks (14,446,599) 13,792,061 1,495,637
Cash and due from banks--beginning of year 54,512,462 40,720,401 39,224,764
-----------------------------------------------
Cash and due from banks--end of year $ 40,065,863 $ 54,512,462 $ 40,720,401
===============================================
Supplemental disclosure of non-cash financing activities:
Debenture and preferred stock conversions $ 6,408,870 $ 11,202,645 $ 2,990
(Forfeiture) Issuance of treasury shares (22,298) 1,381,250 --
Issuance of common stock -- 262,995 --
Supplemental disclosure of non-cash investing activities:
Net unrealized gain on securities transferred from
held to maturity to available for sale -- -- 354,424
Amortized cost of securities transferred from
held to maturity to available for sale -- -- 35,436,261
Supplemental disclosure of cash flow information:
Interest paid 23,607,904 23,225,059 16,627,551
Income taxes paid 9,793,000 10,790,311 7,105,020
See Notes to Consolidated Financial Statements.
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STERLING NATIONAL BANK
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 39,871,111 $ 53,327,089
Interest-bearing deposits with other banks 3,010,000 3,010,000
Federal funds sold -- 3,000,000
Securities available for sale (at estimated market value) 148,862,827 77,550,047
Securities held to maturity (estimated market value
$236,009,925 and $223,668,650, respectively) 236,030,004 226,733,888
---------------------------
Total investment securities 384,892,831 304,283,935
---------------------------
Loans, net of unearned discounts 522,332,429 422,204,265
Less allowance for loan losses 6,492,917 5,013,857
---------------------------
Loans, net 515,839,512 417,190,408
---------------------------
Receivables from affiliates 679,722 660,570
Customers' liability under acceptances 1,125,654 613,430
Premises and equipment, net 7,181,762 5,385,998
Accrued interest receivable 4,124,777 4,248,142
Other assets 7,662,326 6,464,743
---------------------------
$964,387,695 $798,184,315
===========================
Liabilities and Shareholders' Equity
Noninterest-bearing deposits $313,171,421 $231,415,215
Interest-bearing deposits 424,922,661 359,587,160
---------------------------
Total deposits 738,094,082 591,002,375
Federal funds purchased and securities
sold under agreements to repurchase 106,752,546 88,144,400
Other short-term borrowings 19,891,252 30,419,791
Due to affiliates 925,405 841,460
Acceptances outstanding 1,125,654 613,430
Due to factoring clients 30,798,610 16,301,640
Accrued expenses and other liabilities 9,831,839 9,858,109
Long-term borrowings--FHLB 1,750,000 14,500,000
---------------------------
Total liabilities 909,169,388 751,681,205
---------------------------
Commitments and contingent liabilities
Shareholders' Equity
Common stock, $50 par value
Authorized and issued, 358,526 shares 17,926,300 17,926,300
Surplus 19,762,560 18,676,995
Undivided profits 17,339,505 9,810,852
Net unrealized appreciation on securities available for sale, net of tax 189,942 88,963
---------------------------
Total shareholders' equity 55,218,307 46,503,110
---------------------------
$964,387,695 $798,184,315
===========================
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Sterling Bancorp ("the parent company") is a bank holding company, as defined by
the Bank Holding Company Act of 1956, as amended. Throughout the notes, the term
"the Company" refers to Sterling Bancorp and its subsidiaries. The Sterling
companies provide a full range of products and services, including business and
consumer loans, commercial and residential mortgage lending and brokerage,
asset-based financing, accounts receivable management, trade financing, leasing,
trust and estate administration and investment management services. Sterling has
operations in New York and Virginia and conducts business throughout the United
States.
The following summarizes the significant accounting policies of Sterling Bancorp
and its subsidiaries.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent company
and its subsidiaries, principally Sterling National Bank ("the bank"), after
elimination of material intercompany transactions.
General Accounting Policies
The Company follows generally accepted accounting principles and prevailing
practices within the banking industry. Any preparation of financial statements
requires management to make assumptions and estimates that impact the amounts
reported in those statements and are, by their nature, subject to change in the
future as additional information becomes available or as circumstances vary.
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current presentation.
Investment Securities
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" requires, among other things,
that securities designated as available for sale be reported at estimated market
value at each period end with the unrealized gain or loss, net of tax effect,
recorded as a component of shareholders' equity.
Securities are designated as available for sale or held to maturity at the
time of acquisition. Securities which the Company will hold for indefinite
periods of time and which might be sold in the future as part of efforts to
manage interest rate risk or in response to changes in interest rates, changes
in prepayment risk, changes in market conditions or changes in economic factors,
are classified as available for sale and carried at estimated market values. Net
aggregate unrealized gains or losses are included in a valuation allowance
account and are reported, net of taxes, as a component of shareholders' equity.
Securities which the Company has the positive intent and ability to hold to
maturity are designated as held to maturity and are carried at amortized cost,
adjusted for amortization of premiums and accretion of discounts over the period
to maturity. Interest and dividends on securities are reported in interest
income. Gains and losses realized on sales of securities are determined on the
specific identification method and are reported in noninterest income as net
securities (losses)/gains.
Loans
Loans, other than those held for sale, are reported at their principal amount
outstanding, net of unearned discounts and unamortized nonrefundable fees and
direct costs associated with their origination or acquisition. Interest earned
on loans without discounts is credited to income based on loan principal amounts
outstanding at appropriate interest rates. Material origination fees net of
direct costs and discounts on loans are credited to income over the terms of the
loans using a method which results in an approximate level rate of return.
Mortgage loans held for sale, including deferred fees and costs, are
reported at the lower of cost or market value as determined by outstanding
commitments from investors or current investor yield requirements calculated on
the aggregate loan basis. Gains or losses resulting from sales of mortgage
loans, net of unamortized deferred fees and costs, are recognized when the
proceeds are received from investors and are included under the caption
"Mortgage banking income."
The provisions of SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures" are discussed below under "Allowance
for Loan Losses."
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Nonaccrual loans are those on which the accrual of interest has ceased.
Loans, including loans that are individually identified as being impaired under
SFAS No. 114, are generally placed on nonaccrual status immediately if, in the
opinion of management, principal or interest is not likely to be paid in
accordance with the terms of the loan agreement, or when principal or interest
is past due 90 days or more and collateral, if any, is insufficient to cover
principal and interest. Interest accrued but not collected at the date a loan is
placed on nonaccrual status is reversed against interest income. Interest income
is recognized on nonaccrual loans only to the extent received in cash. However,
where there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or interest, are
thereafter applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal payments are brought current
and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses, which is available for losses incurred in the
loan portfolio, is increased by a provision charged to expense and decreased by
charge-offs, net of recoveries.
SFAS No. 114 and No. 118 address the accounting for impairment of certain
loans when it is probable that all amounts due pursuant to the contractual terms
of the loan will not be collected. Adoption of these standards entailed the
identification of commercial and industrial, real estate-mortgage, real
estate-construction and foreign loans which were considered impaired under the
provisions of SFAS No. 114.
Under the provisions of these standards, individually identified impaired
loans are measured based on the present value of payments expected to be
received, using the historical effective loan rate as the discount rate.
Alternatively, measurement may also be based on observable market prices or for
loans that are solely dependent on the collateral for repayment, measurement may
be based on the fair value of the collateral. Loans that are to be foreclosed
are measured based on the fair value of the collateral. If the recorded
investment in the impaired loan exceeds fair value, a valuation allowance is
required as a component of the allowance for loan losses. Changes to the
valuation allowance are recorded as a component of the provision for loan
losses.
The adequacy of the allowance for loan losses is reviewed regularly by
management. Additions to the allowance for loan losses are made by a provision
charged to the expense. On a quarterly basis, a comprehensive review of the
adequacy of the allowance for loan losses is performed. This assessment is made
in the context of historical losses and other factors, including changes in the
composition and volume of the loan portfolio, current economic conditions and
the relationship of the allowance to the loan portfolio.
Excess Cost Over Equity in Net Assets of the Banking Subsidiary
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement established accounting standards for determining and measuring
the impairment of certain assets, including excess cost over equity in net
assets. Since the bank was acquired by the parent company prior to October 31,
1970 and the excess cost over equity in net assets has a continuing value, this
excess is not being amortized.
Premises and Equipment
Premises and equipment, excluding land, are stated at cost less accumulated
depreciation and amortization. Land is reported at cost. Depreciation is
computed on a straight-line basis and is charged to noninterest expense over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is charged to noninterest expense over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is shorter.
Maintenance, repairs and minor improvements are charged to noninterest expenses
as incurred.
Income Taxes
SFAS No. 109, "Accounting for Income Taxes," requires the asset and liability
method of accounting for income taxes. Deferred income tax expense (benefit)
under SFAS No. 109 is determined by recognizing deferred tax assets and
liabilities for the future tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The realization of deferred tax assets is assessed and a valuation
allowance provided for that portion of the assets for which it is more likely
than not that it will not be realized. Deferred tax assets and liabilities are
measured using enacted tax rates and will be adjusted for the effects of future
changes in tax laws or rates, if any.
24
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For income tax purposes, the Company files: a consolidated Federal income
tax return; combined New York City and New York State income tax returns; and
separate state income tax returns for its out-of-state subsidiaries. The parent
company either pays or collects on account of current income taxes to or from
its subsidiaries.
The provision for income taxes for each subsidiary is recorded as if
separate income tax returns had been filed. Income taxes currently payable or
receivable by each subsidiary are paid to or received from the parent company.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks.
Stock Incentive Plans
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock options grants made in 1995
and future years as if the fair-value based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Earnings Per Share
SFAS No. 128, "Earnings per Share," which supersedes Accounting Principles Board
Opinion No. 15, "Earnings per Share," establishes standards for computing,
presenting and disclosing earnings per share ("EPS"). SFAS No. 128 requires the
presentation of basic earnings per share and, for entities with complex capital
structures, diluted earnings per share. Basic earnings per share is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the Company.
The Company has applied the provisions of SFAS No. 128 for the year ended
December 31, 1997 and, in conformity with the provisions of SFAS No. 128, has
restated all prior-period EPS data presented in this report. Adoption of SFAS
No. 128 has resulted in modest changes in EPS data from previously reported
amounts.
Off-Balance Sheet Instruments
The Company enters into interest rate floor contracts primarily to manage
interest rate exposure. These instruments are entered into as hedges against
interest rate risk associated with certain identified assets. The premiums paid
for these instruments are amortized to interest income over the term of the
related asset. Amounts receivable are accounted for on an accrual basis and are
recognized as adjustments to the interest income of the related assets.
NOTE 2. ACQUISITION
On July 1, 1996, the Company acquired the Real Estate Funding Center (now
operating as Sterling National Mortgage Company, Inc.) for 92,179 shares of
common stock. The acquisition was accounted for as a pooling of interests.
However, prior periods have not been restated as the acquisition was not
material.
NOTE 3. CASH AND DUE FROM BANKS
The bank is required to maintain average reserves, net of vault cash, on deposit
with the Federal Reserve Bank of New York against outstanding domestic deposit
liabilities. The required reserves, which are reported in cash and due from
banks, were $10,618,000 and $17,273,000 at December 31, 1997 and 1996,
respectively. Average required reserves during 1997 and 1996 were $11,413,000
and $13,115,000 respectively.
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NOTE 4. MONEY MARKET INVESTMENTS
The Company's money market investments include interest-bearing deposits with
other banks and Federal funds sold. The following table presents information
regarding money market investments.
Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits with other banks
At December 31 --Balance $ 3,010,000 $ 3,010,000 $ 3,000,000
--Average interest rate 5.53% 5.25% 5.57%
--Average original maturity 176 Days 169 Days 181 Days
During the year --Maximum month-end balance 7,010,000 3,010,000 3,540,000
--Daily average balance 3,285,000 2,999,000 3,037,000
--Average interest rate earned 5.68% 5.23% 5.53%
--Range of interest rates earned 5.38-6.25% 4.25-5.69% 3.05-6.16%
================================================
Federal funds sold
At December 31 --Balance $ -- $ 3,000,000 $ 5,000,000
--Average interest rate -- 5.50% 4.00%
--Average original maturity -- 1 Day 1 Day
During the year --Maximum month-end balance 25,000,000 25,000,000 30,000,000
--Daily average balance 6,718,000 5,153,000 9,153,000
--Average interest rate earned 5.52% 5.60% 5.92%
--Range of interest rates earned 5.06-5.88% 4.75-6.50% 4.00-6.38%
================================================
NOTE 5. INVESTMENT SECURITIES
The amortized cost and estimated market value of securities available for sale
are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1997 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 34,747,100 $ 118,876 $ -- $ 34,865,976
Obligations of U.S. government corporations
and agencies--mortgage-backed securities 52,194,376 319,267 150,267 52,363,376
Obligations of state and political subdivisions 3,525,401 63,224 -- 3,588,625
Federal Reserve Bank and other equity securities 58,089,291 13,738 -- 58,103,029
---------------------------------------------------------
Total $148,556,168 $ 515,105 $ 150,267 $148,921,006
=========================================================
December 31, 1996
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 40,963,427 $ 282,824 $ -- $ 41,246,251
Obligations of U.S. government corporations
and agencies--mortgage-backed securities 30,377,325 113,067 231,447 30,258,945
Federal Reserve Bank and other equity securities 6,089,306 3,895 1,280 6,091,921
---------------------------------------------------------
Total $ 77,430,058 $ 399,786 $ 232,727 $ 77,597,117
=========================================================
26
11
The carrying value and estimated market value of securities held to maturity
are as follows:
Gross Gross Estimated
Carrying Unrealized Unrealized Market
December 31, 1997 Value Gains Losses Value
- ---------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations
and agencies--mortgage-backed securities $234,030,004 $ 1,584,134 $ 1,604,213 $234,009,925
Debt securities issued by foreign governments 2,000,000 -- -- 2,000,000
---------------------------------------------------------
Total $236,030,004 $ 1,584,134 $ 1,604,213 $236,009,925
=========================================================
December 31, 1996
- ---------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations
and agencies--mortgage-backed securities $223,983,888 $ 692,968 $ 3,758,206 $220,918,650
Debt securities issued by foreign governments 2,750,000 -- -- 2,750,000
---------------------------------------------------------
Total $226,733,888 $ 692,968 $ 3,758,206 $223,668,650
=========================================================
The following tables present information regarding securities available
for sale and securities held to maturity at December 31, 1997, based on
contractual maturity. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties. The average yield is based on the ratio
of actual income divided by the average outstanding balances during the year.
The average yield on obligations of state and political subdivisions is not
stated on a tax-equivalent basis.
Estimated
Amortized Market Average
Securities available for sale Cost Value Yield
- -----------------------------------------------------------------------------------------
U.S. Treasury securities
Due within 1 year $ 24,783,754 $ 24,806,600
Due after 1 year but within 5 years 9,963,346 10,059,376
---------------------------
Total 34,747,100 34,865,976 6.84%
---------------------------
Obligations of U.S. government corporations
and agencies--mortgage-backed securities 52,194,376 52,363,376 6.66
---------------------------
Obligations of state and political subdivisions
Due after 1 year but within 5 years 357,042 369,270
Due after 5 years 3,168,359 3,219,355
---------------------------
Total 3,525,401 3,588,625 4.52
---------------------------
Federal Reserve Bank and other securities 58,089,291 58,103,029 6.26
---------------------------
Total $148,556,168 $148,921,006 6.66
===========================
Estimated
Carrying Market Average
Securities held to maturity Value Value Yield
- -----------------------------------------------------------------------------------------
Obligations of U.S. government corporations
and agencies--mortgage-backed securities $234,030,004 $234,009,925 6.71%
---------------------------
Debt securities issued by foreign governments
Due after 1 year but within 5 years 1,000,000 1,000,000
Due after 5 years 1,000,000 1,000,000
---------------------------
Total 2,000,000 2,000,000 7.70
---------------------------
Total $236,030,004 $236,009,925 6.72
===========================
27
12
Information regarding securities sales from the available for sale
portfolio is as follows:
Years Ended
December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Proceeds $ -- $15,387,010 $ 8,977,432
Gross gains -- 22,161 85,221
Gross losses -- 105,354 80,420
During 1996, the Federal Home Loan Bank ("FHLB") issued a call for their
securities maturing December 20, 2001. The carrying value of such securities in
the held to maturity portfolio was $3,488,063. As the result of FHLB decision to
call these securities, a gain of $11,939 was realized and reported under the
caption "Net securities (losses)/gains."
The carrying value of investment securities pledged to secure public funds
on deposit, securities sold under agreements to repurchase, advances from the
Federal Home Loan Bank of New York and for other purposes required by law is as
follows:
December 31, 1997 1996
- --------------------------------------------------------------------------------
Secure funds
on deposit $ 19,834,000 $ 21,751,000
Secure repurchase
agreements 85,966,000 91,452,000
Secure Federal
Home Loan
Bank advances 19,389,000 20,129,000
----------------------------------
Total $125,189,000 $133,332,000
==================================
NOTE 6. LOANS
December 31, 1997 1996
- --------------------------------------------------------------------------------
Domestic
Commercial and
industrial $414,298,207 $351,280,247
Lease financing 50,725,573 40,488,618
Real estate--
mortgage 74,335,454 64,368,209
Real estate--
construction 8,352,478 1,136,253
Installment 18,465,665 15,536,413
Foreign
Government
and official
institutions 789,424 789,424
---------------------------------
Loans, gross 566,966,801 473,599,164
Less unearned
discounts 8,484,956 8,082,608
---------------------------------
Loans, net of
unearned discounts $558,481,845 $465,516,556
=================================
The Company originates certain residential mortgage loans with the
intention of reselling those loans, including the servicing rights, without
recourse. Residential mortgage loans held for sale, included in "Real
estate-mortgage," are $9,856,000 and $6,010,000 at December 31, 1997 and 1996,
respectively.
There are no industry concentrations (exceeding 10% of loans, gross) in
the commercial and industrial loan portfolio. Approximately 76% of the bank's
loans are to borrowers located in the metropolitan New York area.
Nonaccrual loans at December 31, 1997 and 1996 totalled $1,388,000 and
$442,000, respectively. There were no reduced rate loans at December 31, 1997 or
1996. The interest income that would have been earned on nonaccrual loans
outstanding at December 31, 1997, 1996 and 1995 in accordance with their
original terms is estimated to be $55,000, $13,000 and $22,000, respectively,
for the years then ended. The applicable interest income actually realized for
the aforementioned years was $-0-, $-0- and $-0-, respectively, for the years
then ended. At the end of these years there were no commitments to lend
additional funds on nonaccrual loans.
Loans are made at normal lending limits and credit terms to officers or
directors (including their immediate families) of the Company or for the
benefits of corporations in which they have a beneficial interest. There were no
outstanding balances on such loans in excess of $60,000 to any individual or
entity at December 31, 1997 or 1996.
NOTE 7. CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
Years Ended
December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Balance at
beginning
of year $ 8,003,392 $ 5,192,203 $ 4,135,810
Provision for
loan losses 3,075,000 2,047,005 1,866,000
---------------------------------------------------
11,078,392 7,239,208 6,001,810
---------------------------------------------------
Less charge-
offs, net of
recoveries:
Charge-offs 2,724,281 737,961 1,000,751
Recoveries (323,499) (1,502,145) (191,144)
---------------------------------------------------
Net
charge-offs
(recoveries) 2,400,782 (764,184) 809,607
---------------------------------------------------
Balance at
end of year $ 8,677,610 $ 8,003,392 $ 5,192,203
===================================================
28
13
During the third quarter of 1996, $1,333,000 was recovered on a previously
charged-off loan in the bank.
The Company follows SFAS No. 114, which establishes new rules for
calculating certain components of the allowance for loan losses. SFAS No. 114
requires that impairment of larger-balance, non-homogenous loans that are
individually evaluated be measured by comparing the net carrying amount of the
loan to the present values of the expected future principal and interest cash
flows discounted at the loan's effective rate, the secondary market value of the
loan, or the fair value of the collateral for collateral-dependent loans. A
valuation allowance for any shortfall is established within the overall
allowance for loan losses. The net carrying amount of the loan reflects credit
write-offs, cash receipts applied to reduce the recorded investment in the loan,
and unearned fees. SFAS No. 114 does not apply to smaller-balance homogenous
consumer loans that are collectively evaluated for impairment, such as
residential mortgages, and consumer installment loans.
As of December 31, 1997 and 1996, $808,000 and $121,000, respectively, of
loans were judged to be impaired within the scope of SFAS No. 114 and carried on
a cash-basis. The average recorded investment in impaired loans during the years
ended December 31, 1997 and 1996, was approximately $526,000 and $219,000,
respectively. The application of SFAS No. 114 measurement principles indicated
that these loans required valuation allowances, totaling $250,000 and $69,000 at
December 31, 1997 and 1996, respectively, which are included within the overall
allowance for loan losses.
NOTE 8. INTEREST-BEARING DEPOSITS
Foreign deposits totaled $2,710,000 and $2,710,000 at December 31, 1997 and
1996, respectively.
Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------
Interest expense
Interest-bearing deposits in domestic offices
Savings $ 530,502 $ 535,712 $ 566,808
NOW 588,212 312,750 287,256
Money Market 4,048,343 3,380,952 3,177,955
Time 9,618,764 7,739,233 7,353,627
---------------------------------------
14,785,821 11,968,647 11,385,646
Interest-bearing deposits in foreign offices
Time 157,802 139,689 154,698
---------------------------------------
Total $14,943,623 $12,108,336 $11,540,344
=======================================
The aggregate of domestic time certificates of deposit in denominations of
$100,000 or more by remaining maturity range and related interest expense is
presented below; there were no foreign time certificates of deposits:
December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
Remaining Maturity Range
Three months or less $ 70,173,286 $ 36,405,594 $ 50,130,956
More than three months through six months 13,028,032 25,727,589 10,377,893
More than six months through twelve months 21,722,086 7,402,946 5,157,534
More than twelve months through twenty-four months 2,698,923 415,862 4,503,102
More than twenty-four months through thirty-six months 120,000 706,068 --
------------------------------------------
Total $107,742,327 $ 70,658,059 $ 70,169,485
==========================================
Years Ended December 31, 1997 1996 1995
------------------------------------------
Interest Expense $ 4,931,786 $ 3,615,702 $ 3,644,778
==========================================
29
14
NOTE 9. SHORT-TERM BORROWINGS
The following table presents information regarding Federal funds purchased,
securities sold under agreements to repurchase and commercial paper.
Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Federal funds purchased
At December 31 --Balance $ 25,000,000 $ 7,000,000 $ --
--Average interest rate 6.58% 5.75% N/A
--Average original maturity 1 Day 1 Day N/A
During the year --Maximum month-end balance 25,000,000 10,000,000 14,000,000
--Daily average balance 3,112,000 2,054,000 679,000
--Average interest rate paid 5.82% 5.52% 5.87%
--Range of interest rates paid 5.25-7.00% 5.06-5.75% 5.10-6.00%
====================================================
Securities sold under agreements to repurchase
At December 31 --Balance $ 81,752,546 $ 81,144,400 $51,265,620
--Average interest rate 5.51% 5.28% 5.36%
--Average original maturity 72 Days 75 Days 86 Days
During the year --Maximum month-end balance 89,979,699 112,347,323 71,063,346
--Daily average balance 80,094,000 85,037,000 53,295,000
--Average interest rate paid 5.37% 5.29% 5.56%
--Range of interest rates paid 4.70-6.17% 3.50-6.17% 2.55-6.00%
====================================================
Commercial paper
At December 31 --Balance $ 24,070,600 $ 32,569,900 $26,607,200
--Average interest rate 5.22% 5.19% 5.11%
--Average original maturity 111 Days 69 Days 68 Days
During the year --Maximum month-end balance 27,491,000 32,643,000 26,627,500
--Daily average balance 24,804,000 29,652,000 21,850,000
--Average interest rate paid 5.24% 5.22% 5.38%
--Range of interest rates paid 3.25-5.45% 2.50-5.60% 3.50-6.08%
====================================================
The parent company has agreements with its line banks for back-up lines of
credit for which it pays a fee at the annual rate of 1/4 of 1% times the line of
credit extended. At December 31, 1997, these back-up bank lines of credit
totaled $19,000,000. No lines were used at any time during 1997 and 1996.
Other short-term borrowings include collateralized advances from the
Federal Home Loan Bank of New York due within one year and treasury tax and loan
funds. At December 31, 1997, Federal Home Loan Bank borrowings include an
advance of $3,000,000 payable January 2, 1998 at a rate of 5.63%, an advance of
$250,000 repayable in March, 1998 at a rate of 5.44% and advances of $12,500,000
repayable in October, 1998 at rates between 5.05% and 5.17%.
At December 31, 1996, Federal Home Loan Bank borrowings include an advance
of $22,000,000 payable January 2, 1997 at a rate of 7.375%, an advance of
$250,000 repayable in March, 1997 at a rate of 5.20% and an advance of
$3,250,000 repayable in October, 1997 at a rate of 4.84%.
At December 31, 1995, Federal Home Loan Bank borrowings include an advance
of $250,000 payable in March, 1996 at a rate of 4.59% and advances totaling
$4,250,000 repayable in October, 1996 at rates between 4.50% and 4.61%.
30
15
NOTE 10. LONG-TERM CONVERTIBLE SUBORDINATED DEBENTURES
The parent company's floating interest rate convertible subordinated debentures
were traded on the New York Stock Exchange. A summary of changes in these
debentures follows (amounts in thousands):
Maturity Dates
---------------------------------
Nov. 1, July 1,
---------------------
1998 2001 Total
---------------------------------
Series 4th Fifth
- -------------------------------------------------------------------------------
Balance at December 31, 1995 $ 14,326 $ 7,020 $ 21,346
Repayments, conversions and retirements during the year (7,937) (7,020) (14,957)
---------------------------------
Balance at December 31, 1996 6,389 $ -- 6,389
========
Repayment, conversion and retirements during the year (6,389) (6,389)
--------- ---------
Balance at December 31, 1997 $ -- $ --
========= =========
The debentures bore interest at a floating interest rate equal to one half
of one percent (1/2%) above the daily average reference rate of interest of a
designated major New York City bank, payable semi-annually. The daily average
interest rates paid on the Third series for the six-month interest periods ended
December 31, 1995 and June 30, 1995 were 9.30% and 9.30%, respectively. The
daily average interest rates paid on the 4th series for the 129 day period ended
November 6, 1997 (the final redemption date) and for the six-month interest
periods ended June 30, 1997, December 31, 1996, June 30, 1996, December 31,
1995, and June 30, 1995 were 9.00% and 8.85%, 8.80% and 8.75%, and 9.30% and
9.30%, respectively. The daily average interest rates paid on the Fifth series
for the six-month interest periods ended December 31, 1996, June 30, 1996,
December 31, 1995, and June 30, 1995 were 8.80% and 8.75%, 9.30%, and 9.30%,
respectively. The debentures were convertible into common shares of the parent
company.
NOTE 11. OTHER LONG-TERM BORROWINGS
These borrowings represent advances from the Federal Home Loan Bank of New York
("FHLB"), as follows:
December 31, 1997 1996
- --------------------------------------------------------------------------------
Interest Rates and Maturity Dates
5.05% to 5.44%, due 1998 $ -- $12,750,000
5.68%, due 1999 350,000 350,000
5.92%, due 2000 350,000 350,000
6.07%, due 2001 350,000 350,000
6.22%, due 2002 350,000 350,000
6.37%, due 2003 350,000 350,000
------------------------------
Total $ 1,750,000 $14,500,000
==============================
Weighted average interest rate 6.05% 5.22%
==============================
Under the terms of a collateral agreement with the FHLB, advances are
secured by stock in the FHLB and by certain qualifying assets (primarily
mortgage-backed securities) having market values at least equal to 110% of the
advances outstanding.
31
16
NOTE 12. PREFERRED STOCK
The parent company is authorized to issue up to 644,389 shares of convertible
preferred stock, $5 par value, in one or more series. At December 31, 1997 and
1996 two series of preferred stock had been issued--Series B and Series D.
The following table presents information regarding the parent company's
preferred stock:
December 31, 1997 1996
- --------------------------------------------------------------------------------
Series B shares
Authorized 4,389
shares; issued and
outstanding--
1,230 shares, at
liquidation value $ 24,600 $ 24,600
Series D shares
Authorized 300,000
shares; issued and
outstanding--246,213
and 248,200 shares
respectively, at
liquidation value 2,462,130 2,482,000
------------------------------
Total $2,486,730 $2,506,600
==============================
Series B
Series B shares may be redeemed, in whole or in part, at the election of the
parent company at a price of $28 per share, plus accrued and unpaid dividends to
the date of redemption. In the event of involuntary liquidation of the parent
company, the holders of these shares are entitled to receive, before any
distribution to the holders of common shares, $20 per share ("liquidation
value"). At the option of holders of these shares, such shares are convertible
into common shares of the parent company at a conversion rate of two common
shares for each Series B share surrendered. There were no conversions during
1997; during 1996, 58 shares were converted. Dividends on the Series B shares
are paid at the rate of $.10 per annum, payable semi-annually and are
cumulative. Holders of these shares are entitled to one vote for each share held
and vote together as one class with the holders of the common shares of the
parent company.
Series D
Series D shares may only be issued to the trustee acting on behalf of an
employee stock ownership plan ("ESOP") or other employee benefit plan of the
Company. The Series D shares are convertible into common shares of the parent
company on a share for share basis. During 1993, the parent company issued
250,000 shares to the trustee of the Company's ESOP. These shares are entitled
to receive cash dividends in the amount of $.6125 per annum (subject to
adjustment), payable quarterly. Participants in the Company's ESOP are entitled
to vote in accordance with the terms of the ESOP and vote together as one class
with the holders of the common shares of the parent company. The holders of
these shares are entitled to receive $10 per share and certain other preferences
on liquidation, dissolution or winding up. During 1997 and 1996, 1,987 shares
and 1,800 shares, respectively, were converted into common shares. See Footnote
16 for a discussion of the Company's ESOP.
NOTE 13. COMMON STOCK
Number of shares reserved for issuance:
1997 1996
- --------------------------------------------------------------------------------
Conversion of
subordinated debentures:
Floating rate due 11/1/98 -- 511,120
Conversion of Series B
preferred shares 2,460 2,460
Conversion of Series D
preferred shares 296,213 298,200
---------------------------
298,673 811,780
===========================
Number of shares
outstanding at
December 31, 8,217,907 7,683,190
===========================
Number of shareholders
at December 31, 2,233 2,366
===========================
NOTE 14. RESTRICTIONS ON THE BANK
Various legal restrictions limit the extent to which the bank can supply funds
to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the Currency to an amount not to exceed the net profits (as defined) for that
year to date combined with its retained net profits for the preceding two
calendar years. In addition, from time to time dividends are paid to the parent
company by the finance subsidiaries from their retained earnings without
regulatory restrictions.
NOTE 15. STOCK INCENTIVE PLAN
In April 1992, shareholders approved a Stock Incentive Plan ("the plan")
covering up to 100,000 common shares of the parent company. Under the plan, key
employees of the parent company and its subsidiaries could be granted awards in
the form of incentive stock options ("ISOs"), non-qualified stock options
("NQSOs"), stock appreciation rights
32
17
("SARs"), restricted stock or a combination of these. The plan is administered
by committees of the Board of Directors. In April 1995, shareholders approved
amendments to the plan which increased the number of shares covered under the
plan by 300,000 and which provided for the annual automatic grant of NQSOs to
each director who is not an employee or officer ("outside director") of the
Company. Under this provision annual NQSO awards covering 2,000 common shares of
the parent company are granted to each outside director beginning April 1995 and
continuing through April 1999. In April 1996, shareholders approved amendments
to the plan which increased the number of shares covered under the plan by
300,000. After giving effect to stock option and restricted stock awards
granted, shares available for grant were 453,250, 361,000 and 287,000 at
December 31, 1997, 1996 and 1995, respectively.
Stock Options
The following tables present information on the qualified and non-qualified
stock options outstanding as of December 31, 1997, 1996 and 1995 and changes
during the years then ended:
1997 1996 1995
-----------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Qualified Stock Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 199,000 $10.09 97,000 $ 7.54 100,000 $7.55
Granted 212,059 15.50 109,500 12.50 --
Exercised (13,000) 12.50 -- --
Forfeit (17,000) 14.62 (7,500) 12.50 (3,000) 8.00
-------- -------- --------
Outstanding at end of year 381,059 $12.81 199,000 $10.09 97,000 $7.54
=============================================================================
Options exercisable at end of year 181,000 148,000 97,000
======== ======== ========
Weighted-average fair value of
options granted during the year $4.56 $2.13 N/A
======== ======== ========
Non-Qualified Stock Options
- ------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 30,500 $ 9.42 16,000 $ 7.25 -- --
Granted 32,941 15.74 16,000 11.38 16,000 $7.25
Exercised (2,500) 8.90 (1,500) 7.25 -- --
-------- -------- --------
Outstanding at end of year 60,941 $12.86 30,500 $ 9.42 16,000 $7.25
=============================================================================
Options exercisable at end of year 8,000 2,500 --
======== ======== ========
Weighted-average fair value of
options granted during the year $4.23 $2.40 N/A
======== ======== ========
The following table presents information regarding qualified and
non-qualified stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------ ---------------------------
Range of Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg.
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/97 Contractual Life Price 12/31/97 Price
- ------------------------------------------------------------------------------ ---------------------------
Qualified $7-$16 381,059 7.8 years $12.81 181,000 $9.84
Non-Qualified 7- 16 60,941 4.7 years 12.86 8,000 8.80
Other than director NQSOs which expire five years from the date of grant
and become exercisable in four annual installments, starting one year from the
date of grant, or upon the death or disability of the grantee, stock options
generally expire ten years from the date of grant or, to the extent appropriate
to qualify to the maximum extent possible
33
18
as ISOs vest in installments, subject to earlier exercisability upon the death
or disability of the grantee or other specified events. Amounts received upon
exercise of options are recorded as common stock and capital surplus.
On January 1, 1996 the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." The statement encourages, but does not require
companies to use a fair value-based method of accounting for stock-based
employee compensation plans, including stock options and stock appreciation
rights. Under this method, compensation expense is measured as of the date the
awards are granted based on the estimated fair value of the awards, and the
expense is generally recognized over the vesting period. If a company elects to
continue using the intrinsic value-based method under APB Opinion No. 25, pro
forma disclosures of net income and net income per share are required as if the
fair value-based method had been applied. Under the intrinsic method,
compensation expense is the excess, if any, of the market price of the stock as
of the grant date over the amount employees must pay to acquire the stock or
over the price established for determining appreciation. Under the Company's
current compensation policies, there is no such excess on the date of grant and
therefore, no compensation expense is recorded.
The fair value of each option grant is estimated on the date of grant
using a Black-Scholes option-pricing model with the following assumptions:
1997 1996 1995
- --------------------------------------------------------------------------
Dividend yield 2.5% 2% 2%
Volatility 20% 20% 20%
Expected term
Qualified 3 years 3 years 3 years
Non-qualified
(Directors) 4 years 4 years 4 years
Non-qualified
(Officers) 8-10 years -- --
Risk-free interest rate 6.45% 5.31% 6.99%
The Company has elected to continue to apply APB Opinion No. 25 and
related interpretations in accounting for its stock incentive plan. Accordingly,
no compensation expense has been recognized in the consolidated statements of
income related to the stock incentive plan. Had compensation expense been
determined based on the estimated fair value of the awards at the grant dates,
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated in the table that follows:
Years Ended
December 31, 1997 1996
- --------------------------------------------------------------------------------
Net income
As reported $ 10,888,000 $ 8,252,000
Pro forma 10,700,000 8,200,000
Basic earnings per share
As reported 1.38 1.17
Pro forma 1.36 1.16
Diluted earnings per share
As reported 1.27 1.01
Pro forma 1.25 1.01
Pro forma net income reflects only options granted in 1997 and 1996.
Additionally, the full impact of calculating compensation expense for stock
options under SFAS No. 123 is not reflected in the pro forma net income above,
since such expense is apportioned over the vesting period of those options which
are expected to vest. Compensation expense for options granted prior to 1995 is
also not considered.
Restricted Stock
On January 3, 1996, 110,500 shares of restricted stock were awarded from
Treasury shares. The fair value was $12.50 per share. These awards vest to
recipients over a four year period at the rate of 25% per year. The plan calls
for the forfeiture of non-vested shares which are restored to the Treasury and
become available for future awards. During 1997 and 1996, 2,250 and 2,500
shares, respectively, were forfeited. Unearned compensation resulting from these
awards is amortized as a charge to noninterest expenses over a four year period;
such charges were $449,999 and $230,210 in 1997 and 1996, respectively. The
balance of unearned compensation is shown as a reduction of shareholders'
equity. For income tax purposes, the Company is entitled to a deduction in an
amount equal to the average market value of the shares on vesting date and
dividends paid on shares for which restrictions have not lapsed.
34
19
NOTE 16. EMPLOYEE STOCK OWNERSHIP PLAN
On March 5, 1993, the Company established an Employee Stock Ownership Plan
("ESOP"). This plan covers substantially all employees with one or more years of
service of at least 1,000 hours who are at least 21 years of age. During 1993,
the parent company issued 250,000 shares of Series D preferred stock at a price
of $10.00 per share to the Company's ESOP trust. The trust borrowed $2,500,000
from the bank, to pay for the shares. The ESOP loan is at a fixed interest rate
for a term of ten years with quarterly payments of interest only through
December 31, 1995. Quarterly principal payments at an annual rate of $250,000
and $350,000 commence on March 31, 1996 and March 31, 1999, respectively, plus
interest. The bank match-funded the ESOP loan with collateralized advances from
the Federal Home Loan Bank of New York. The ESOP shares, pledged as collateral
for the ESOP loan, are held in a suspense account and released for allocation
among the participants as principal and interest on the ESOP loan are repaid.
Under the terms of the ESOP, participants may vote both allocated and
unallocated shares.
The Company makes quarterly contributions to the ESOP equal to the debt
service on the ESOP loan less dividends paid on the ESOP shares. All dividends
paid are used for debt service. ESOP shares released from the suspense account
are allocated among the participants on the basis of salary in the year of
allocation. The Company accounts for its ESOP in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans."
Accordingly, the Company initially recorded a deduction from shareholders'
equity equal to the purchase price of the shares reflecting such amount as
unearned compensation.
The consolidated balance sheets report as unearned compensation the remaining
shares pledged as collateral. The unearned compensation is reduced as payments
are made on the loan and, as shares are released from the suspense account, the
Company recognizes compensation expense equal to the current market price of the
common shares into which the preferred shares are convertible, and the shares
become outstanding for earnings per share computations. Dividends on unallocated
ESOP shares are recorded as a reduction of accrued interest payable; dividends
on allocated ESOP shares are recorded as a reduction of retained earnings. In
addition, because the parent company guaranteed a liquidation and redemption
price of $10.00 per share, the amount, if any, by which $10.00 exceeds the year-
end market price of the parent company common stock into which the outstanding
Series D shares are convertible is reflected outside shareholders' equity less
its related shares of unearned compensation for the unallocated shares.
Compensation expense was $266,800, $279,100 and $122,150 for 1997, 1996
and 1995, respectively, with a corresponding reduction in unearned compensation.
As of December 31, 1997, 62,552 shares had been allocated and 26,680 shares had
been released for allocation; 156,981 shares were not released ("unallocated").
The following table presents interest paid on the ESOP loan, dividends paid on
the Series D preferred shares and contributions made by the Company:
Years Ended
December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Interest paid $163,919 $183,451 $190,104
Dividends paid 151,139 152,915 153,125
Company
contributions 12,780 30,536 36,979
35
20
NOTE 17. EMPLOYEE BENEFIT PLAN
The Company has a noncontributory defined benefit pension plan that covers
substantially all employees with one or more years of service of at least 1,000
hours who are at least 21 years of age. The quarterly payments to the plan are
determined annually based upon the amount needed to satisfy the Employee
Retirement Income Security Act funding standards.
The following table sets forth the pension plan funded status:
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
($9,219,237) and ($7,784,876), respectively $ (9,923,317) $ (8,436,781)
=============================
Projected benefit obligation for service rendered to date $(13,469,764) $(11,532,656)
Plan assets at fair value (U.S. Treasury securities, insurance
contract and listed stock) 14,762,254 11,761,815
-----------------------------
Funded status 1,292,490 229,159
Unrecognized prior service cost (86) (2,706)
Unrecognized net loss 588,253 1,392,975
-----------------------------
Prepaid pension cost $ 1,880,657 $ 1,619,428
=============================
Net pension expense included the following components:
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------
Service cost $ 688,786 $ 631,846 $ 509,817
Interest cost 846,056 755,538 723,038
Actual return on assets (2,755,702) (1,142,243) (2,075,850)
Deferral of asset gain/(loss) 1,808,854 374,335 1,570,743
------------------------------------------
Total included in employee benefits $ 587,994 $ 619,476 $ 727,748
==========================================
Pension cost is determined using assumptions at the beginning of the year.
The projected benefit obligation (PBO) is determined using assumptions at the
end of the year. Assumptions used to determine pension cost and the PBO were:
December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Discount rate 7.0% 7.5% 7.0%
Rate of increase in future compensation levels 4.5% 4.5% 4.0%
Long-term rate of return on plan assets 8.0% 8.0% 8.0%
36
21
NOTE 18. INCOME TAXES
The current and deferred tax provisions (benefits) for each of the last three
fiscal years are as follows:
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Federal
Current $ 6,628,015 $ 4,882,913 $ 3,896,674
Deferred (709,948) (377,704) (666,228)
--------------------------------------------
Total $ 5,918,067 $ 4,505,209 $ 3,230,446
============================================
State and Local
Current $ 3,100,684 $ 2,659,665 $ 2,959,732
Deferred (144,664) 410,624 (211,326)
--------------------------------------------
Total $ 2,956,020 $ 3,070,289 $ 2,748,406
============================================
Total
Current $ 9,728,699 $ 7,542,578 $ 6,856,406
Deferred (854,612) 32,920 (877,554)
--------------------------------------------
Total $ 8,874,087 $ 7,575,498 $ 5,978,852
============================================
Reconciliations of income tax provisions with taxes or tax benefits
computed at Federal statutory rates are as follows:
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Federal statutory rate 35% 35% 34%
---------------------------------------
Computed tax $6,916,872 $5,539,573 $3,949,616
Increase in tax resulting from:
Principally state and local taxes,
net of Federal income tax benefit 1,957,215 2,035,925 2,029,236
---------------------------------------
Total $8,874,087 $7,575,498 $5,978,852
=======================================
The components of the net deferred tax asset, included in other assets,
are as follows:
December 31, 1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets
Difference between financial statement provision
for loan losses and tax bad debt deduction $ 3,057,392 $ 2,721,154
Non-accrual and other interest 1,817,774 1,778,110
Deferred compensation 527,240 204,599
Other 895,110 628,595
---------------------------
Total deferred tax assets 6,297,516 5,332,458
---------------------------
Deferred tax liabilities
Pension and benefit plans 541,503 558,687
Other 170,545 48,993
---------------------------
Total deferred tax liabilities 712,048 607,680
---------------------------
Net deferred tax asset 5,585,468 4,724,778
SFAS No. 115 deferred tax liability (167,464) (77,058)
---------------------------
Total net deferred tax asset $ 5,418,004 $ 4,647,720
===========================
Management believes, based upon current facts, that more likely than not
there will be sufficient taxable income in future years to realize the deferred
tax assets. However, there can be no assurance about the level of future
earnings.
37
22
NOTE 19. EARNINGS PER SHARE
SFAS No. 128, "Earnings per Share" simplified the standards for computing
earnings per share ("EPS") previously found in Accounting Principles Board
Opinion No. 15 and replaced the presentation of primary and fully diluted EPS
with the presentation of basic and diluted EPS.
Basic EPS is computed by dividing net income less preferred dividends on
Series B shares and allocated Series D shares, held on behalf of the Employee
Stock Ownership Plan, ("basic net income") by the weighted-average common shares
outstanding during the year.
Diluted EPS is computed by dividing basic net income plus the after-tax
interest expense on outstanding convertible subordinated debentures by the
weighted-average common shares and common equivalent shares outstanding during
the year. The common equivalent shares outstanding includes the weighted average
number of Series B and Series D, held on behalf of the Employee Stock Ownership
Plan, preferred shares, the weighted average shares associated with outstanding
subordinated debentures and the dilutive effect of unexercised stock options
using the treasury stock method. When applying the treasury stock method, the
average price of the company's common stock is utilized.
The following table provides a reconciliation of basic and diluted EPS as
required by SFAS No. 128:
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Basic EPS:
Net income $10,888,403 $ 8,251,854 $ 5,637,666
Less: preferred dividends 38,313 21,218 13,737
----------- ----------- -----------
Net income available for
common shareholders 10,850,090 7,874,653 $1.38 8,230,636 7,015,185 $1.17 5,623,929 6,346,396 $0.89
===== ===== =====
Diluted EPS:
Options 140,716 42,920[1] 11,538
Convertible preferred stock 246,922 249,333 250,000
Convertible subordinated
debt 136,709 361,588 596,502 1,394,705 1,198,069 2,215,684
------------------------- ------------------------ -------------------------
Net income available for
common shareholders
plus assumed
conversions $10,986,799 8,623,879 $1.27 $ 8,827,138 8,702,143 $1.01 $ 6,821,998 8,823,618 $0.77
========================================================================================================
[1] Options to purchase 102,000 shares of common stock at $12.50 per share
were outstanding as of December 31, 1996 but were not included in the
computation of diluted EPS because the option's exercise price was greater
than the average market price of the common shares.
38
23
NOTE 20. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No.107 "Disclosures about Fair Value of Financial Instruments" requires the
Company to disclose the "fair values" of certain financial instruments for which
it is practical to estimate "fair value."
Much of the information used to arrive at fair value is highly subjective
and judgmental in nature and therefore the results may not be precise. The
subjective factors include, among other things, estimated cash flows, risk
characteristics, credit quality and interest rates all of which are subject to
change. With the exception of investment securities and long-term debt, the
Company's financial instruments are not readily marketable and market prices do
not exist. Since negotiated prices for the instruments which are not readily
marketable depend greatly on the motivation of the buyer and seller, the amounts
which will actually be realized or paid per settlement or maturity of these
instruments could be significantly different.
The following disclosures represent the Company's best estimate of the
"fair value" of both on- and off-balance sheet financial instruments.
Financial Instruments with Carrying Amount Equal to Fair Value
The carrying amount of cash and due from banks, interest-bearing deposits
with other banks, Federal funds sold, customers' liability under acceptances,
accrued interest receivable, Federal funds purchased and securities sold under
agreements to repurchase, commercial paper, other short-term borrowings,
acceptances outstanding, due to factoring clients, and accrued interest payable,
as a result of their short-term nature, is considered to be equal to fair value.
Investment Securities
For investment securities, fair value has been based upon current market
quotations, where available. If quoted market prices are not available, fair
value has been estimated based upon the quoted price of similar instruments.
Loans
The fair value of loans which reprice within 90 days reflecting changes in the
base rate is equal to their carrying amount. For other loans, the estimated fair
value is calculated based on discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality and for similar maturities. These calculations have been adjusted
for credit risk based on the Company's historical credit loss experience.
The estimated fair value for secured nonaccrual loans is the value of the
underlying collateral which is sufficient to repay each loan. For other
nonaccrual loans, the estimated fair value represents book value less a credit
risk adjustment based on the Company's historical credit loss experience.
Deposits
SFAS No. 107 requires that the fair value of demand, savings, NOW and certain
money market deposits be equal to their carrying amount. The Company believes
that the fair value of these deposits is clearly greater than that prescribed by
SFAS No. 107.
For other types of deposits with fixed maturities, fair value has been
estimated based upon interest rates currently being offered on deposits with
similar characteristics and maturities.
Long-Term Debt
The fair value of the Company's convertible subordinated debentures is based on
current market quotations. For other long-term borrowings, the estimated fair
value is calculated based on discounted cash flow analyses, using interest rates
currently being quoted for similar characteristics and maturities.
Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees
The notional amount of off-balance sheet commitments to extend credit, standby
letters of credit, and financial guarantees, is considered equal to fair value.
Resulting from the uncertainty involved in attempting to assess the likelihood
and timing of a commitment being drawn upon, coupled with lack of an established
market and the wide diversity of fee structures, the Company does not believe it
is meaningful to provide an estimate of fair value that differs from the
notional value of the commitment.
Off-Balance-Sheet Financial Instruments
The Company enters into interest rate floor contracts to manage interest rate
exposure. These instruments are entered into as hedges against interest rate
risk associated with certain identified assets. At December 31, 1997 the
notional amount of these instruments was $125,000,000. The Company paid up front
premiums of $939,000 which are amortized over the term of the related assets. At
December 31, 1997, the unamortized premiums on these contracts totaled $416,000
and the amount receivable was $6,000. The estimated fair value of these
contracts generally reflects the amount the Company would receive to terminate
the contracts, thereby taking into account the current unrealized gain on these
contracts. Dealer quotes are available on all of these contracts.
At December 31, 1997 the estimated fair value of these contracts was $719,900.
39
24
The following is a summary of the book values and estimated fair values of
the Company's financial assets and liabilities:
1997 1996
---------------------------------------------------------
Carrying Estimated Carrying Estimated
December 31, Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------
Financial Assets
Cash and due from banks $ 40,065,863 $ 40,065,863 $ 54,512,462 $ 54,512,462
Interest-bearing deposits
with other banks 3,010,000 3,010,000 3,010,000 3,010,000
Federal funds sold -- -- 3,000,000 3,000,000
Investment securities 384,951,010 384,930,931 304,331,005 301,265,767
Loans, net 549,804,235 547,637,000 457,513,164 459,437,000
Customers' liability
under acceptances 1,125,654 1,125,654 613,430 613,430
Accrued interest receivable 4,147,008 4,147,008 4,257,142 4,257,142
Financial Liabilities
Demand, NOW, savings and
money market deposits 527,442,624 527,442,624 430,959,831 430,959,831
Time deposits 203,965,356 204,411,000 143,462,530 143,626,000
Federal funds purchased and
securities sold under
agreements to repurchase 106,752,546 106,752,546 88,144,400 88,144,400
Commercial paper 24,070,600 24,070,600 32,569,900 32,569,900
Other short-term borrowings 19,891,252 19,891,252 30,419,791 30,419,791
Acceptances outstanding 1,125,654 1,125,654 613,430 613,430
Due to factoring clients 30,798,610 30,798,610 23,140,504 23,140,504
Accrued interest payable 3,539,838 3,539,838 4,893,549 4,893,549
Long-term convertible
subordinated debentures -- -- 6,389,000 6,852,000
Other long-term borrowings--FHLB 1,750,000 1,759,000 14,500,000 14,816,000
40
25
NOTE 21. PARENT COMPANY
CONDENSED BALANCE SHEETS
December 31, 1997 1996
- --------------------------------------------------------------------------------
Assets
Cash and due from banks $ 882,222 $ 1,291,441
Interest-bearing deposits--banking subsidiary 5,850,000 12,112,500
Loans, net of unearned discounts 38,149,416 40,462,949
Less allowance for loan losses 2,184,693 1,719,947
---------------------------
Loans, net 35,964,723 38,743,002
---------------------------
Investment in subsidiaries
Banking subsidiary 76,376,747 67,661,550
Other subsidiaries 1,144,658 2,853,608
Due from subsidiaries
Banking subsidiary 925,405 661,460
Other subsidiaries 18 113,266
Other assets 976,584 821,125
---------------------------
$122,120,357 $124,257,952
===========================
Liabilities and Shareholders' Equity
Commercial paper $ 24,070,600 $ 32,569,900
Other short-term borrowings 840,000 250,000
Due to subsidiaries
Banking subsidiary 679,722 660,570
Other subsidiaries 995,232 1,035,752
Accrued expenses and other liabilities 1,162,237 4,175,295
Long-term convertible subordinated debt -- 6,389,000
Other long-term debt 1,750,000 2,000,000
Shareholders' equity 92,622,566 77,177,435
---------------------------
$122,120,357 $124,257,952
===========================
CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
Income
Dividends and interest from
Banking subsidiary $ 2,987,442 $ 8,929,861 $ 5,257,669
Other subsidiaries 39,515 1,170,336 491,981
Management and service fees from
Banking subsidiary 714,789 1,046,527 1,088,290
Other subsidiaries 126,498 111,600 111,600
Interest and fees on loans 6,356,532 6,067,638 5,074,121
Other income 74,950 211,133 33,025
-------------------------------------------
Total income 10,299,726 17,537,095 12,056,686
-------------------------------------------
Expenses
Interest expense 1,863,594 3,080,443 3,503,035
Provision for loan losses 495,000 762,500 534,000
Salaries and employee benefits 2,270,132 2,053,707 1,223,985
Computer service fees and rent paid to banking subsidiary -- 76,006 73,677
Other expenses 1,147,966 1,725,400 1,438,763
-------------------------------------------
Total expenses 5,776,692 7,698,056 6,773,460
-------------------------------------------
Income before income taxes and equity in
undistributed net income of subsidiaries 4,523,034 9,839,039 5,283,226
Provision for income taxes 1,208,878 456,571 134,524
-------------------------------------------
3,314,156 9,382,468 5,148,702
Equity in undistributed net income/
(excess dividends) of subsidiaries[1] 7,574,247 (1,130,614) 488,964
-------------------------------------------
Net income $ 10,888,403 $ 8,251,854 $ 5,637,666
===========================================
[1] Reflects the excess of the dividends allowable under applicable bank
regulations over GAAP net income of the banking subsidiary for year ended
December 31, 1996.
41
26
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 10,888,403 $ 8,251,854 $ 5,637,666
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 495,000 762,500 534,000
Amortization of unearned compensation 716,509 509,600 122,150
Decrease in accrued interest receivable 21,086 2,013 242,548
(Decrease) Increase in accrued expenses
and other liabilities (3,013,058) (3,527,648) 3,999,315
(Decrease) Increase in due to subsidiaries, net (21,368) (1,146,834) 586,252
(Increase) Decrease in due from subsidiaries, net (150,697) 6,159,515 (5,067,312)
Equity in (undistributed net income) excess
dividends of subsidiaries (7,574,247) 1,130,614 (488,964)
Other, net 573,862 907,314 175,979
---------------------------------------------
Net cash provided by operating activities 1,935,490 13,048,928 5,741,634
---------------------------------------------
Investing Activities
Net decrease (increase) in interest-bearing deposits--
banking subsidiary 6,262,500 (1,587,500) 240,000
Net decrease (increase) in loans 2,313,533 (10,151,036) (11,028,350)
---------------------------------------------
Net cash provided by (used in) investing activities 8,576,033 (11,738,536) (10,788,350)
---------------------------------------------
Financing Activities
Net (decrease) increase in commercial paper (8,499,300) 5,962,700 11,934,400
Net increase in other short-term borrowings 590,000 -- --
Cash dividends paid on preferred and common shares (2,946,192) (2,244,852) (1,588,106)
Prepayments and maturities of debentures -- (3,773,515) (5,097,010)
Proceeds from exercise of stock options 184,750 10,875 --
Purchase of minority interest -- (8,418) --
Decrease in other long-term borrowings (250,000) (250,000) (250,000)
---------------------------------------------
Net cash (used in) provided by financing activities (10,920,742) (303,210) 4,999,284
---------------------------------------------
Net (decrease) increase in cash and due from banks (409,219) 1,007,182 (47,432)
Cash and due from banks--beginning of year 1,291,441 284,259 331,691
---------------------------------------------
Cash and due from banks--end of year $ 882,222 $ 1,291,441 $ 284,259
=============================================
Supplemental disclosure of non-cash financing activities:
Debenture and preferred stock conversions $ 6,408,870 $ 11,202,645 $ 2,990
(Forfeiture) Issuance of Treasury shares (22,298) 1,381,250 --
Issuance of common shares -- 262,995 --
Supplemental disclosure of cash flow information:
Interest paid 2,020,305 2,432,185 3,473,980
Income taxes paid 9,793,000 10,790,311 7,105,020
The parent company is required to maintain a deposit with the bank in an
amount equal to the unpaid principal balance on the bank's loan to the trustee
of the Employee Stock Ownership Plan. The required deposit which is reported in
interest-bearing deposits on the parent company's condensed balance sheet was
$2,000,000 at December 31, 1997.
42
27
NOTE 22. CAPITAL MATTERS
The Company and the bank are subject to risk-based capital regulations. The
purpose of these regulations is to quantitatively measure capital against
risk-weighted assets, including off-balance sheet items. These regulations
define the elements of total capital into Tier 1 and Tier 2 components and
establish minimum ratios of 4% for Tier 1 capital and 8% for Total Capital for
capital adequacy purposes. Supplementing these regulations, is a leverage
requirement. This requirement establishes a minimum leverage ratio, (at least 3%
to 5%) which is calculated by dividing Tier 1 capital by adjusted quarterly
average assets (after deducting goodwill). In addition, the Company and the bank
are subject to the provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1981 ("FDICIA") which imposes a number of mandatory
supervisory measures. Among other matters, FDICIA established five capital
categories ranging from "well capitalized" to "critically under capitalized."
Such classifications are used by regulatory agencies to determine a bank's
deposit insurance premium, approval of applications authorizing institutions to
increase their asset size or otherwise expand business activities or acquire
other institutions. Under the provisions of FDICIA a "well capitalized"
institution must maintain minimum leverage, Tier 1 and Total Capital ratios of
5%, 6% and 10%, respectively. At December 31, 1997, the Company and the bank
exceeded the requirements for "well capitalized" institutions.
The following tables present information regarding the Company's and the
bank's risk-based capital and related ratios:
The Company The bank
--------------------------------------------
12/31/97 12/31/96 12/31/97 12/31/96
- ---------------------------------------------------------------------------------------------------
($ in thousands)
Components
Shareholders' equity $ 92,623 $ 77,177 $ 55,218 $ 46,503
Goodwill (21,158) (21,158) -- --
Net unrealized appreciation on securities
available for sale, net of tax[1] (197) (90) (190) (89)
---------------------------------------------
Tier 1 Capital 71,268 55,929 55,028 46,414
---------------------------------------------
Allowance for loan losses (limited to 1.25%
of total risk weighted assets) 8,430 6,580 6,493 5,014
Subordinated debt (limited to 50% of Tier 1 Capital) -- 1,278 -- --
---------------------------------------------
Tier 2 Capital 8,430 7,858 6,493 5,014
---------------------------------------------
Total Risk-based Capital $ 79,698 $ 63,787 $ 61,521 $ 51,428
=============================================
[1] As directed by regulatory agencies, this amount must be excluded from the
computation of Tier 1 capital.
43
28
Ratios and Minimums
($ in thousands)
For Capital To Be Well
Actual Adequacy Minimum Capitalized
------------------------------------------------------------------
As of December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------
Total Capital (to Risk Weighted Assets):
The Company $79,698 11.82% $53,935 8.00% $67,419 10.00%
The bank 61,521 9.64 51,038 8.00 63,798 10.00
Tier 1 Capital (to Risk Weighted Assets):
The Company 71,268 10.57 26,968 4.00 40,451 6.00
The bank 55,028 8.63 25,519 4.00 38,279 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 71,268 8.31 34,320 4.00 42,900 5.00
The bank 55,028 6.66 33,032 4.00 41,290 5.00
As of December 31, 1996
- --------------------------------------------------------------------------------------------------------------------------
Total Capital (to Risk Weighted Assets):
The Company $63,787 12.15% $41,997 8.00% $52,496 10.00%
The bank 51,428 10.67 38,566 8.00 48,208 10.00
Tier 1 Capital (to Risk Weighted Assets):
The Company 55,929 10.65 20,998 4.00 31,497 6.00
The bank 46,414 9.63 19,283 4.00 28,925 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 55,929 6.89 32,449 4.00 40,562 5.00
The bank 46,414 6.13 30,295 4.00 37,868 5.00
44
29
NOTE 23. COMMITMENTS AND CONTINGENT LIABILITIES
Total rental expenses under cancelable and noncancelable leases for premises and
equipment were $2,282,112, $1,793,433 and $1,659,658, respectively, for the
years ended December 31, 1997, 1996 and 1995.
The future minimum rental commitments as of December 31, 1997 under
noncancelable leases follow:
Rental
Year(s) Commitments
- -------------------------------------------------------
1998 $ 1,793,423
1999 1,692,249
2000 1,651,677
2001 1,365,980
2002 1,088,217
2003 and thereafter 6,377,044
-----------
Total $13,968,590
===========
Certain of the leases included above have escalation clauses and/or
provide that the Company pay maintenance, electric, taxes and other operating
expenses applicable to the leased property.
In the normal course of business, there are various commitments and
contingent liabilities outstanding which are properly not recorded on the
balance sheet. Management does not anticipate that losses, if any, as a result
of these transactions would materially affect the financial position of the
Company.
Loan commitments, substantially all of which have an original maturity of
one year or less, were approximately $16,170,000 as of December 31, 1997. These
commitments are agreements to lend to a customer as long as the conditions
established in the contract are met. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. The total
commitment amounts do not necessarily represent future cash requirements because
some of the commitments are expected to expire without being drawn upon. The
bank evaluates each customers' creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary, by the bank upon extension
of credit is based on management's credit evaluation of the borrower. Collateral
held varies but may include cash, U.S. Treasury and other marketable securities,
accounts receivable, inventory and property, plant and equipment.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the bank to guarantee the performance of a customer to a
third party. At December 31, 1997, these commitments totaled $20,446,391 of
which $16,815,731 expired within one year, $3,360,260 within two years, $20,400
within three years, and $250,000 within four years. Approximately 56% of the
commitments were automatically renewable for periods of one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The bank holds cash or cash
equivalents and marketable securities as collateral supporting those commitments
for which collateral is deemed necessary. The extent of collateral held for
those commitments at December 31, 1997 ranged from 0 percent to 100 percent; the
average amount collateralized is approximately 9%.
The Company uses interest rate floor contracts to manage fluctuating
interest rates. In exchange for the payment of a premium, an interest rate floor
gives the Company the right to receive at specified future dates the amount, if
any, by which the market interest rate specified in the floor falls below the
fixed floor rate, multiplied by the notional amount of the floor. The credit
exposure on a floor is limited to this interest derived amount. Potential credit
losses are minimized through careful evaluation of counterparty credit standing.
The floors currently held by the Company have an average remaining term of
approximately 1-3/4 years and total notional amount of $125 million.
In the normal course of business there are various legal proceedings
pending against the Company. Management, after consulting with counsel, is of
the opinion that there should be no material liability with respect to such
proceedings, and accordingly no provision has been made in the accompanying
consolidated financial statements.
45
30
NOTE 24. QUARTERLY DATA (UNAUDITED)
1997 Quarter Mar 31 Jun 30 Sept 30 Dec 31
- --------------------------------------------------------------------------------------------------------------------------
Total interest income $16,316,315 $16,570,278 $17,094,531 $17,844,949
Total interest expense 5,218,914 5,519,017 5,676,763 5,839,499
Net interest income 11,097,401 11,051,261 11,417,768 12,005,450
Provision for loan losses 771,000 610,000 781,500 912,500
Noninterest income 3,113,389 3,021,847 3,458,825 3,377,868
Noninterest expenses 8,906,055 8,676,940 9,003,588 9,119,736
Income before income taxes 4,533,735 4,786,168 5,091,505 5,351,082
Net income 2,462,476 2,633,116 2,817,717 2,975,094
Earnings per average common share
Basic .32 .33 .36 .37
Diluted .30 .31 .33 .33
Common stock closing price
High 17 3/8 19 23 5/8 24 3/8
Low 14 1/4 14 7/8 18 1/8 21 1/8
Quarter--end 15 1/4 18 5/8 22 3/4 24
1996 Quarter
- --------------------------------------------------------------------------------------------------------------------------
Total interest income $14,036,419 $14,686,277 $15,542,917 $16,731,415
Total interest expense 5,010,506 4,959,782 5,598,989 5,764,480
Net interest income 9,025,913 9,726,495 9,943,928 10,966,935
Provision for loan losses 577,000 562,500 401,250 506,255
Net securities gains 22,161 -- -- (93,415)
Noninterest income 1,639,373 1,982,110 3,103,179 3,255,057
Noninterest expenses 6,743,078 7,346,476 8,510,059 9,097,766
Income before income taxes 3,367,369 3,799,629 4,135,798 4,524,556
Net income 1,759,745 1,985,086 2,161,360 2,345,663
Earnings per average common share
Basic .27 .29 .30 .31
Diluted .23 .24 .27 .27
Common stock closing price
High 13 5/8 12 7/8 13 15
Low 11 1/4 10 3/8 10 1/4 12 1/2
Quarter--end 12 7/8 11 12 3/4 14 3/4
46
31
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick LLP
The Shareholders and Board of Directors
Sterling Bancorp:
We have audited the accompanying consolidated balance sheets of Sterling
Bancorp and Subsidiaries as of December 31, 1997 and 1996, the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997 and
the consolidated statements of condition of Sterling National Bank as of
December 31, 1997 and 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sterling
Bancorp and Subsidiaries as of December 31, 1997 and 1996, the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 and the financial position of Sterling National Bank as
of December 31, 1997 and 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
New York, New York
January 28, 1998
47
32
STERLING BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following commentary presents management's discussion and analysis of the
financial condition and results of operations of Sterling Bancorp (the "parent
company"), a bank holding company as defined by the Bank Holding Company Act of
1956, as amended, and its wholly-owned subsidiaries Sterling Banking
Corporation, Sterling Industrial Loan Association, and Sterling National Bank
(the "bank"). The bank, which is the principal subsidiary, owns all of the
outstanding shares of Sterling Factors Corporation, Sterling National Mortgage
Company, Inc., Sterling National Mortgage Corp., and Sterling Real Estate
Holding Company Inc. Throughout this discussion and analysis, the term "the
Company" refers to Sterling Bancorp and its subsidiaries. This discussion and
analysis should be read in conjunction with the consolidated financial
statements and supplemental data contained elsewhere in the report.
Selected Financial Data
(in thousands except per share data)
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
Summary of Operations
Total interest income $ 67,826 $ 60,997 $ 53,484 $ 43,493 $ 32,482 $ 30,572
Total interest expense 22,254 21,334 19,319 14,882 10,168 11,510
Net interest income 45,572 39,663 34,165 28,611 22,314 19,062
Provision for loan losses 3,075 2,047 1,866 1,053 690 1,290
Net securities (losses)/gains -- (71) 5 42 -- 1,568
Noninterest income 12,972 9,979 5,973 4,429 3,929 3,682
Noninterest expenses 35,706 31,697 26,660 21,998 19,770 18,659
Income before taxes 19,762 15,827 11,617 10,031 5,783 4,363
Provision for income taxes 8,874 7,575 5,979 6,025 2,628 1,786
Net income 10,888 8,252 5,638 4,006 3,155 2,577
Per common share-basic 1.38 1.17 .89 .64 .50 .41
-diluted 1.27 1.01 .77 .57 .46 .41
Dividends per common share .37 .31 .25 .21 .20 .20
Year End Balance Sheets
Investment securities 384,951 304,331 299,238 311,782 286,816 219,571
Loans, net of unearned
discounts and term
Federal funds sold 558,482 465,517 397,229 312,769 258,751 189,791
Total assets 1,019,980 861,605 775,608 706,636 653,039 578,248
Noninterest-bearing deposits 312,462 229,977 224,081 174,897 174,089 159,234
Interest-bearing deposits 418,946 344,446 326,947 342,405 298,897 296,925
Long-term convertible
subordinated debentures -- 6,389 21,346 26,446 26,892 35,166
Shareholders' equity 92,623 77,177 59,657 53,719 52,857 50,150
Average Balance Sheets
Investment securities 304,753 321,957 304,741 321,005 255,079 208,463
Loans, net of unearned
discounts and term
Federal funds sold 446,268 376,879 311,119 255,223 228,604 211,917
Total assets 838,354 777,695 695,522 658,884 556,111 498,017
Noninterest-bearing deposits 199,431 175,232 153,244 144,974 125,804 112,025
Interest-bearing deposits 377,301 330,520 327,102 307,747 283,599 257,982
Long-term convertible
subordinated debentures 4,618 16,779 23,975 26,640 27,292 36,160
Shareholders' equity 82,515 65,768 56,401 53,249 51,118 49,682
48
33
COMPANY BUSINESS
The Company provides a full range of financial products and services, including
business and consumer loans, commercial and residential mortgage lending and
brokerage, asset-based financing, accounts receivable management services, trade
financing, equipment leasing, corporate and consumer deposit services, trust and
estate administration and investment management services. The Company has
operations in New York and Virginia and conducts business throughout the United
States.
There is intense competition in all areas in which the Company conducts
its business. The Company competes with banks and other financial institutions.
At December 31, 1997, the bank's year-to-date average earning assets (of which
loans were 57% and investment securities were 42%) represented approximately 96%
of the Company's year-to-date average earning assets.
The Company regularly evaluates acquisition opportunities and conducts due
diligence activities in connection with possible acquisitions. As a result,
acquisition discussions and, in some cases negotiations, regularly take place
and future acquisitions could occur.
OVERVIEW
The Company reported net income for 1997 of $10.9 million, representing $1.27
per share, calculated on a diluted basis, compared to $8.3 million, or $1.01 per
share calculated on a diluted basis, in 1996. This increase reflects the
improved net interest margin and continued growth in noninterest income.
Net interest income was $45.6 million for 1997, up from $39.7 million in
1996. The net interest margin improved to 6.38% for 1997 compared to 5.93% for
1996. These increases were due principally to management's strategy of
increasing loan portfolio.
The provision for loan losses increased $1.0 million to $3.1 million in
1997 compared to $2.1 million in 1996, reflecting management's continuing
evaluation of the loan portfolio, principally as the result of the growth in the
portfolio, and the allowance for loan losses appropriate thereto.
Noninterest income rose $3.0 million to $13.0 million in 1997 principally
due to increases from mortgage banking and factoring activities.
Noninterest expenses totaled $35.7 million for 1997 compared to $31.7
million in 1996. The increases in expense categories were incurred to support
growing levels of business activity and continued investments in the business
franchise.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earnings. Net interest income can be affected
by changes in market interest rates as well as the level and composition of
assets, liabilities and shareholders' equity. The increases (decreases) for the
components of interest income and interest expense, expressed in terms of
fluctuation in average volume and rate are shown on page 60. Information as to
the components of interest income and interest expense and average rates is
provided in the Average Balance Sheets shown on page 59.
Net interest income for 1997 increased $5,909,000 to $45,572,000 from
$39,663,000 for the comparable period in 1996.
Total interest income aggregated $67,826,000 up $6,829,000 for 1997 as
compared to $60,997,000 for the same period of 1996. The yield on interest
earning assets was 9.44% for 1997 compared with 9.05% for the comparable period
in 1996. The increase in interest income was principally due to an increase in
income earned on the Company's loan portfolio as a result of management's
strategy of increasing loan outstandings.
Interest earned on the loan portfolio amounted to $46,783,000 up
$7,562,000 when compared to a year ago. Average loan balances amounted to
$446,268,000 up $69,389,000 from an average balance of $376,879,000 the prior
year period. The increase in average loans, primarily in the Company's
commercial and industrial loan portfolio, accounted for $7,158,000 or 95% of the
increase in interest earned on loans.
Interest earned on investment securities amounted to $20,447,000 down
$883,000 when compared to a year ago principally due to lower average
outstandings.
Interest expense increased $920,000 to $22,254,000 for 1997 from
$21,334,000 for the comparable period in 1996. The increase in interest expense
was due to the higher average balances coupled with higher average rates paid
for savings and time deposits.
Interest expense on savings and time deposits amounted to $14,944,000 up
$2,836,000 when compared to a year ago due to increases in average outstandings
and the cost of funds. Average outstandings increased $46,781,000 to
$377,301,000 when comparing 1997 to the same period in 1996. The average rate
paid on interest-bearing deposits was 3.96% in 1997 compared to 3.66% in the
comparable year ago period.
49
34
Interest expense associated with borrowed funds decreased $1,916,000 when
comparing 1997 to the same period in 1996 as a result of lower average
outstandings.
Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), and principally as the result of the growth in the
loan portfolios, the provision for loan losses increased to $3,075,000 up
$1,028,000 when compared to the same period last year.
Noninterest Income
Noninterest income increased $3,063,000 for 1997 when compared with 1996 as a
result of increased fees from factoring services and mortgage banking services
and higher income from other fee based services.
Noninterest Expenses
Noninterest expenses increased $4,009,000 for 1997 versus the same period last
year reflecting higher salary and employee benefit costs as well as higher
general business costs and professional fees associated with increased business
development efforts in accordance with a policy of continuing investment in the
Company's business franchise.
Provision for Income Taxes
The increase in the provision for income taxes was principally due to higher
pretax earnings partially offset by tax strategies implemented in 1997.
BALANCE SHEET ANALYSIS
Securities
The Company's securities portfolios are comprised of principally U.S. government
and U.S. government corporation and agency mortgage-backed securities along with
other debt and equity securities. At December 31, 1997, the Company's portfolio
of securities totaled $384,951,000 of which U.S. government and U.S. government
corporation and agency guaranteed mortgage-backed securities having an average
life of approximately 4.5 years amounted to $286,393,000. The Company has the
intent and ability to hold to maturity securities classified "held to maturity."
These securities are carried at cost, adjusted for amortization of premiums and
accretion of discounts. The gross unrealized gains and losses on "held to
maturity" securities were $1,584,000 and $1,604,000, respectively. Securities
classified as "available for sale" may be sold in the future, prior to maturity.
These securities are carried at market value. Net aggregate unrealized gains or
losses on these securities are included in a valuation allowance account and are
shown net of taxes, as a component of shareholders' equity. "Available for sale"
securities included gross unrealized gains of $515,000 and gross unrealized
losses of $150,000. Given the generally high credit quality of the portfolio,
management expects to realize all of its investment upon the maturity of such
instruments, and thus believes that any market value impairment is temporary in
nature.
Information regarding book values and range of maturities by type of
security and weighted average yields for totals of each category is presented in
Footnote 5 beginning on page 26. The average yield by maturity range is not
available.
The following table sets forth the composition of the Company's investment
securities by type with related carrying values at the end of the most recent
three fiscal years:
December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
U.S. Treasury
securities $ 34,866 $ 41,246 $ 52,373
Obligations of
U.S. government
corporations
and agencies--
mortgage-backed
securities 286,393 254,243 238,397
Obligations of
states and
political sub-
divisions 3,589 -- --
Debt securities
issued by foreign
governments 2,000 2,750 3,500
Federal Reserve
Bank and other
equity securities 58,103 6,092 4,968
----------------------------------------
Total $384,951 $304,331 $299,238
========================================
Loan Portfolio
A key management objective is to maintain the quality of the loan portfolio.
This objective is achieved by maintaining high underwriting standards coupled
with regular evaluation of the creditworthiness of and the designation of
lending limits for each borrower. The portfolio strategies seek to avoid
concentrations by industry or loan size in order to minimize credit exposure and
to originate loans in markets with which the Company is familiar.
50
35
The Company's commercial and industrial loan portfolio represents
approximately 74% of gross loans. Loans in this category are typically made to
small and medium sized businesses and range between $250,000 and $10 million.
The primary source of repayment is from the borrower's operating profits and
cash flows. Based on underwriting standards, loans may be secured in whole or in
part by collateral such as liquid assets, accounts receivable, equipment,
inventory, real property or other forms of collateral. The Company's real estate
loan portfolio, which represents approximately 15% of gross loans, is secured by
mortgages on real property located principally in the City of New York and the
State of Virginia. The collateral securing any loan may vary in value based on
the success of the business, economic conditions and other factors.
The following table sets forth the composition of the Company's loan
portfolio, net of unearned discounts, at the end of each of the most recent five
fiscal years:
December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Balance Total Balance Total Balance Total Balance Total Balance Total
------------------------------------------------------------------------------------------------------
($ in thousands)
Domestic
Commercial and
industrial $413,887 74.11% $350,641 75.32% $309,173 77.83% $258,494 82.65% $216,677 72.53%
Term federal
funds sold -- -- -- -- -- -- -- -- 40,000 13.39
Equipment lease
financing 43,705 7.82 34,750 7.46 24,311 6.12 -- -- -- --
Real estate--
mortgage 73,878 13.23 63,633 13.67 48,588 12.23 39,997 12.79 31,474 10.53
Real estate--
construction 8,352 1.50 1,136 0.25 1,040 0.26 1,486 0.47 1,666 0.56
Installment--
individuals 17,871 3.20 14,568 3.13 13,328 3.36 12,003 3.84 8,145 2.73
Foreign
Government and
official
institutions 789 0.14 789 0.17 789 0.20 789 0.25 789 0.26
------------------------------------------------------------------------------------------------------
Loans, net of
unearned
discounts $558,482 100.00% $465,517 100.00% $397,229 100.00% $312,769 100.00% $298,751 100.00%
======================================================================================================
Asset Quality
Intrinsic to the lending process is the possibility of loss. In times of
economic slowdown, the risk inherent in the Company's portfolio of loans is
increased. While management endeavors to minimize this risk, it recognizes that
loan losses will occur and that the amount of these losses will fluctuate
depending on the risk characteristics of the loan portfolio which in turn
depends on current and expected economic conditions, the financial condition of
borrowers and the credit management process.
The allowance for loan losses is maintained through the provision for loan
losses, which is a charge to operating earnings. The adequacy of the provision
and the resulting allowance for loan losses is determined by management's
continuing review of the loan portfolio, including identification and review of
individual problem situations that may affect the borrower's ability to repay,
review of overall portfolio quality through an analysis of current charge-offs,
delinquency and nonperforming loan data, estimates of the value of any
underlying collateral, review of regulatory examinations, an assessment of
current and expected economic conditions and changes in the size and character
of the loan portfolio. The allowance reflects management's evaluation of both
loans presenting identified loss potential and of the risk inherent in various
components of the portfolio, including loans identified as impaired as required
by SFAS No. 114. Thus an increase in the size of the portfolio or in any of its
components could necessitate an increase in the allowance even though there may
not be a decline in credit quality or an increase in potential problem loans. A
significant change in any of the evaluation factors described above could
51
36
result in future additions to the allowance. At December 31, 1997, the ratio of
the allowance to loans, net of unearned discounts, was 1.6% and the allowance
was $8,678,000. At such date, the Company's nonaccrual loans amounted to
$1,388,000; $808,000 of such loans were judged to be impaired within the scope
of SFAS No. 114 and required valuation allowances of $250,000. Based on the
foregoing, as well as management's judgement as to the current risks inherent in
the loan portfolio, the Company's allowance for possible loan losses was deemed
adequate to absorb all reasonably anticipated losses on specifically known and
other possible credit risks associated with the portfolio as of December 31,
1997. Net losses within the loan portfolio are not statistically predictable and
changes in conditions in the next twelve months could result in future
provisions for loan losses varying from the level taken in 1997. Potential
problem loans, which are loans that are currently performing under present loan
repayment terms but where known information about possible credit problems of
borrowers cause management to have serious doubts as to the ability of the
borrowers to continue to comply with the present repayment terms, aggregated
$3,138,000 at December 31, 1997.
The following table sets forth certain information with respect to the
Company's loan loss experience for each of the most recent five fiscal years:
December 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
(in thousands)
Average loans outstanding, net of
unearned discounts, during year $ 446,268 $ 376,879 $ 311,119 $ 255,223 $ 228,604
===============================================================
Allowance for loan losses:
Balance at beginning of year $ 8,003 $ 5,192 $ 4,136 $ 3,414 $ 3,177
---------------------------------------------------------------
Charge-offs:
Commercial and industrial 2,064 561 622 401 670
Lease financing 228 49 344 -- --
Real estate 239 71 16 109 --
Installment 193 57 19 22 45
---------------------------------------------------------------
Total charge-offs 2,724 738 1,001 532 715
---------------------------------------------------------------
Recoveries:
Commercial and industrial 240 1,456 144 196 28
Lease financing 56 37 -- 5 13
Real estate 2 -- 47 -- --
Installment 26 9 -- -- 11
---------------------------------------------------------------
Total recoveries 324 1,502 191 201 52
---------------------------------------------------------------
Subtract/(Add)
Net charge-offs/(recoveries) 2,400 (764) 810 331 663
---------------------------------------------------------------
Provision for loan losses 3,075 2,047 1,866 1,053 690
---------------------------------------------------------------
Allowance--acquired portfolio -- -- -- -- 210
---------------------------------------------------------------
Balance at end of year $ 8,678 $ 8,003 $ 5,192 $ 4,136 $ 3,414
===============================================================
Ratio of net charge-offs to
average loans outstanding, net of
unearned discounts during year .54% 0% .26% .13% .29%
===============================================================
On June 1, 1993 the parent company purchased for cash the assets
(principally loans) of Zenith Financial Corporation, a nationwide provider of
consumer receivables financing. The purchase price included the allowance for
loan losses of $209,627.
52
37
To comply with a regulatory requirement to provide such an allocation of
the allowance for loan losses, the following table presents the Company's
allocation of the allowance. This allocation is based on subjective estimates by
management and may vary from year to year based on management's evaluation of
the risk characteristics of the loan portfolio. The amount allocated to a
particular loan category may not necessarily be indicative of actual future
charge-offs in a loan category. Management believes that the allowance must be
viewed in its entirety since it is available for future charge-offs in any loan
category.
December 31, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-----------------------------------------------------------------------------------
($ in thousands)
Domestic
Commercial and
industrial $4,156 1.00% $3,369 0.96% $2,457 0.79% $2,487 0.96% $1,757 0.81%
Lease financing 648 1.48 508 1.48 355 1.46 -- -- -- --
Real estate--
mortgage 827 1.12 566 0.89 472 0.97 434 1.09 291 0.92
Real estate--
construction 70 0.84 8 0.70 8 0.77 12 0.81 63 3.78
Installment--
individuals 267 1.49 279 1.92 167 1.25 142 1.18 94 1.15
Unallocated 2,710 -- 3,273 -- 1,733 -- 1,061 -- 1,209 --
------ ------ ------ ------ ------
Total $8,678 1.55% $8,003 1.72% $5,192 1.31% $4,136 1.32% $3,414 1.14%
==================================================================================
Deposits
The Company's principal source of funds continues to be deposits, consisting of
demand (noninterest-bearing) NOW, Savings, money market and time deposits
(principally certificates of deposit).
The following table provides certain information with respect to the
Company's deposits for each of the most recent three fiscal years:
December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Domestic
Demand $312,462 $229,977 $224,081
NOW 54,056 32,761 30,150
Savings 24,856 25,548 26,967
Money Market 136,069 133,510 120,655
Time deposits 201,255 149,916 145,935
------------------------------------
Total domestic deposits 728,698 571,712 547,788
Foreign
Time deposits 2,710 2,710 3,240
------------------------------------
Total deposits $731,408 $574,422 $551,028
====================================
Fluctuations of balances in total or among categories at any date can
occur based on the Company's mix of assets and liabilities as well as on
customer's balance sheet strategies. Historically, however, average balances for
deposits have been relatively stable. Information regarding these average
balances for the most recent three fiscal years is presented on page 59.
53
38
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is its net interest income; therefore the
Company devotes significant time and has invested in resources to assist in the
management of interest rate risk and asset quality. The Company's net interest
income is affected by changes in market interest rates, and by the level and
composition of interest-earning assets and interest-bearing liabilities.
The Company's objectives in its asset/liability management are to
utilize its capital effectively, to provide adequate
liquidity and to enhance net interest income, without taking undue risks or
subjecting the Company unduly to interest rate fluctuations.
The Company takes a coordinated approach to the management of its
liquidity, capital and interest rate risk. This risk management process is
governed by policies and limits established by senior management which are
reviewed and approved by the Asset/Liability Committee ("ALCO"). ALCO, which is
comprised of members of senior management and the Board, meets to review among
other things, economic conditions, interest rates, yield curve, cash flow
projections, expected customer actions, liquidity levels, capital ratios and
repricing characteristics of assets, liabilities and off-balance sheet financial
instruments.
Interest Rate Risk
The Company's balance sheet structure is primarily short-term in nature with a
substantial portion of assets and liabilities repricing or maturing within one
year. The Company monitors the interest rate sensitivity of its on- and
off-balance sheet positions by examining its near-term sensitivity and its
longer term gap (as defined below) position. The Company utilizes several
financial tools in its management of interest rate risk, primarily utilizing a
sophisticated income simulation model and complementing this with a traditional
gap analysis.
The income simulation model measures the Company's net interest income
sensitivity or volatility to interest rate changes utilizing statistical
techniques that allow the Company to consider various factors which impact net
interest income. These factors include actual maturities, estimated cash flows,
repricing characteristics, deposit growth/retention and, most importantly, the
relative sensitivity of the Company's assets and liabilities to changes in
market interest rates. The Company believes that it is significant that its core
deposit costs are internally managed and tend to exhibit less sensitivity to
changes in interest rates than its adjustable rate assets whose yields are based
on external indices and change in concert with market interest rates.
The Company's interest rate sensitivity is determined by identifying the
probable impact of changes in market interest rates on the yields on the
Company's assets and the rates which would be paid on its liabilities. This
modeling technique involves a degree of estimation based on certain assumptions
that management believes to be reasonable. Utilizing this process, management
can project the impact of changes in interest rates on net interest margin. The
Company has established certain limits for the potential volatility of its net
interest margin assuming certain levels of changes in market interest rates with
the objective of maintaining a stable net interest margin under various probable
rate scenarios. The Company can also utilize this technique to stress test its
portfolio to determine the impact of various interest rate scenarios on the
Company's net interest income.
A traditional gap analysis is prepared based on the maturity and repricing
characteristics of interest-earning assets and interest-bearing liabilities for
selected time bands. The gap analysis at December 31, 1997 is presented on page
61. The mismatch between repricings or maturities within a time band is commonly
referred to as the "gap" for that period. A positive gap (asset sensitive) where
interest-rate sensitive assets exceed interest-rate sensitive liabilities
generally will result in an institution's net interest margin increasing in a
rising rate environment and decreasing in a falling rate environment. A negative
gap (liability sensitive) will generally have the opposite result on an
institution's net interest margin. However, the traditional gap analysis does
not assess the relative sensitivity of assets and liabilities to changes in
interest rates. The Company utilizes the gap analysis to complement its income
simulations modeling, primarily focusing on the longer term structure of the
balance sheet.
As part of its interest rate risk strategy, the Company uses off-balance
sheet financial instruments (derivatives) to hedge the interest rate sensitivity
of its assets. The income derived from these off-balance sheet instruments and
the amortization of premiums related thereto are reflected in the yield of the
related on-balance sheet assets being hedged. The Company has written policy
guidelines, which have been approved by the Board of Directors and the
Asset/Liability Committee, governing the use of off-balance sheet financial
instruments, including
54
39
approved counterparties, risk limits and appropriate internal control
procedures. The credit risk of derivatives arises principally from the potential
for a counterparty to fail to meet its obligation to settle a contract on a
timely basis. At December 31, 1997, all counterparties have investment grade
credit ratings from the major rating agencies. Each counterparty is specifically
approved for applicable credit exposure.
At December 31, 1997, the Company's off-balance sheet financial
instruments consisted of four interest rate floor contracts having a notional
amount totaling $125 million; a contract with a notional amount of $50 million
has a final maturity of February 27, 2000, another contract with a notional
amount of $25 million has a final maturity of October 10, 1999, another contract
with a notional amount of $25 million has a final maturity of May 1, 2001 and
another contract with a notional amount of $25 million has a final maturity of
March 17, 1998. These financial instruments are being used as part of the
Company's interest rate risk management and not for trading purposes.
Interest rate floor contracts require the counterparty to pay the Company
at specified future dates the amount, if any, by which the specified interest
rate (3 month LIBOR) falls below the fixed floor rates, applied to the notional
amounts. The Company utilizes these financial instruments to adjust its interest
rate risk position without exposing itself to principal risk and funding
requirements. The interest rate floor contracts require the Company to pay a fee
for the right to receive a fixed interest payment.
The Company purchased interest rate floor contracts to reduce the impact
of falling rates on its floating rate commercial loans. The Company paid up
front premiums of $939,000 which are amortized monthly against interest income
from the designated assets. At December 31, 1997, the unamortized premiums on
these contracts totaled $416,000 and are included in other assets. At December
31, 1997, $6,000 was receivable under these contracts.
Liquidity Risk
Liquidity is the ability to meet cash needs arising from changes in various
categories of assets and liabilities. Liquidity is constantly monitored and
managed at both the parent company and the bank levels. Liquid assets consist of
cash and due from banks, interest-bearing deposits in banks and Federal funds
sold and securities available for sale. Primary funding sources include core
deposits, capital markets funds and other money market sources. Core deposits
include domestic noninterest-bearing and interest-bearing retail deposits, which
historically have been relatively stable. The parent company and the bank have
significant unused borrowing capacity. Contingency plans exist and could be
implemented on a timely basis to minimize the impact of any dramatic change in
market conditions.
While the parent company generates income from its own operations, it also
depends for its cash requirements on funds maintained or generated by its
subsidiaries, principally the bank. Such sources have been adequate to meet the
parent company's cash requirements throughout its history.
Various legal restrictions limit the extent to which the bank can supply
funds to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the Currency to an amount not to exceed the net profits as defined, for that
year to date combined with its retained net profits for the preceding two
calendar years.
At December 31, 1997, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $24,321,000. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating
$45,146,000 and back-up credit lines with banks of $19,000,000. Since 1979, the
parent company has had no need to use available back-up lines of credit.
While the past performance is no guarantee of the future, management
believes that the Company's funding sources (including dividends from all its
subsidiaries) and the bank's funding sources will be adequate to meet their
liquidity requirements in the future.
CAPITAL
The Company and the bank are subject to risk-based capital regulations. The
purpose of these regulations is to quantitatively measure capital against
risk-weighted assets, including off-balance sheet items. These regulations
define the elements of total capital into Tier 1 and Tier 2 components and
establish minimum ratios of 4% for Tier 1 capital and 8% for Total Capital for
capital adequacy purposes. Supplementing these regulations, is a leverage
requirement. This requirement establishes a minimum leverage ratio, (at least 3%
to 5%) which is calculated by dividing Tier 1 capital by adjusted quarterly
average assets (after deducting goodwill). Information regarding the Company's
and the bank's risk-based
55
40
capital at December 31, 1997 and December 31, 1996, is presented in Footnote 22
on pages 43 and 44. In addition the Company and the bank are subject to the
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1981
("FDICIA") which imposes a number of mandatory supervisory measures. Among other
matters, FDICIA established five capital categories ranging from "well
capitalized" to "critically under capitalized." Such classifications are used by
regulatory agencies to determine a bank's deposit insurance premium, approval of
applications authorizing institutions to increase their asset size or otherwise
expand business activities or acquire other institutions. Under the provisions
of FDICIA, a "well capitalized" institution must maintain minimum leverage, Tier
1 and Total Capital ratios of 5%, 6% and 10%, respectively. At December 31,
1997, the Company and the bank exceeded the requirements for "well capitalized"
institutions.
Year 2000 Project
The Company and/or its software vendors are modifying all of its computer
programs to be year 2000 compatible. The Company does not believe that the cost
it will incur in connection with the year 2000 modifications will have a
material adverse effect on the financial condition or the results of operations
of the Company. However, unanticipated events relating to work on the
development and modification of computer systems, including work performed by
suppliers or vendors to the Company, and the satisfactory resolutions of such
events, may be beyond the control of the Company in responding to such events.
Market for the Company's Common Stock and Related Security Holder Matters
The parent company's common stock is traded on The New York Stock Exchange under
the symbol STL. Information regarding the quarterly prices of the common stock
is presented in Footnote 24 on page 46. Information regarding the average common
shares outstanding and dividends per common share is presented in the
Consolidated Statements of Income on page 19. Information regarding legal
restrictions on the ability of the bank to pay dividends is presented in
Footnote 14 on page 32. There are no such restrictions on the ability of the
parent company to pay dividends to its shareholders.
Information related to the parent company's preferred stock is presented in
Footnote 12 on page 32.
Recent Accounting Developments
Effective January 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 125, "Accounting for Transfer and Servicing of Financial
Assets and Extinguishments of Liabilities," except for those transactions that
are governed by SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement 125." SFAS No. 127 was issued in December 1996 to
extend the effective date of the provisions of SFAS No. 125 as they relate to
secured borrowings, collateral and repurchase agreements, dollar rolls,
securities lending and similar transactions for one year. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996
based on consistent application of a financial-components approach that focuses
on control. Under this approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes financial assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement provides consistent
standards for distinguishing transfer of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 125 supersedes SFAS No. 76,
"Extinguishment of Debt," and SFAS No. 77, "Reporting by Transferors for
Transfers for Transfer of Receivable with Recourse," and SFAS No. 122,
"Accounting for Mortgage Servicing Rights," and amends SFAS No. 115, "Accounting
for Certain Investment in Debt and Equity Securities," and SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities." The adoption of SFAS No.
125 had no material effect on the consolidated financial statements of the
Company, nor does the Company expect the amendments to SFAS No. 125 contained in
SFAS No. 127 to have a material effect on the financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
56
41
for reporting and presenting of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. It does not address issues of recognition or measurement
of comprehensive income and its components. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Under the requirements of
SFAS No. 130, an enterprise must classify in a financial statement items of
other comprehensive income by their nature and display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and requires
reclassification of financial statements for earlier periods provided for
comparative purposes. Management of the Company does not expect that the
adoption of SFAS No. 130 will have a material impact on the Company's financial
condition or results of operations when adopted in the first quarter of 1998
since these requirements are disclosure related only.
Also in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements, requires that selected information
about operating segments be reported in interim financial statements issued to
shareholders, and establishes standards for related disclosures about an
enterprise's products and services, geographic areas and major customers. As
defined in SFAS No. 131, operating segments are components of an enterprise
about which separate financial information is available and that is evaluated
regularly by the enterprise's chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business," and amends SFAS No.
94, "Consolidation of All Majority-Owned Subsidiaries." SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. SFAS No. 131 need not be applied to interim financial statements in the
initial "Reporting for Segments of a Business," and amends SFAS No. 94,
"Consolidation of All Majority-Owned Subsidiaries." SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application. Management of the Company does not
expect that the adoption of SFAS No. 131 will have a material impact on the
Company's financial condition or results of operations when adopted in the first
quarter of 1998 since these requirements are disclosure related only.
Forward-Looking Information
This report contains statements that constitute forward-looking statements and
are subject to certain risks and uncertainties that could cause actual facts to
differ materially from those presented in this report. Readers are cautioned not
to place undue reliance on these forward-looking statements which speak only as
of the date of this report.
COMPARISON OF YEARS ENDED DECEMBER 31,
1996 AND DECEMBER 31, 1995
Overview
Net income increased $2,614,000 for the year ended December 31, 1996 when
compared to 1995.
Net Interest Income
Net interest income for 1996 increased $5,498,000 to $39,663,000 from
$34,165,000 for the comparable period in 1995.
Total interest income aggregated $60,997,000 up $7,513,000 for 1996 as
compared to $53,484,000 for the same period of 1995. The yield on interest
earning assets was 9.05% for 1996 compared with 8.65% for the comparable period
in 1995. The increase in interest income was principally due to an increase in
income earned on the Company's loan portfolio as a result of asset growth and
higher market interest rates.
57
42
Interest earned on the loan portfolio amounted to $39,221,000 up
$6,495,000 when compared to a year ago. Average loan balances amounted to
$376,879,000 up $65,760,000 from an average loan of $311,119,000 the prior year
period. The increase in the average loans, primarily in the Company's commercial
and industrial loan portfolio, accounted for $6,038,000 or 93% of the increase
in interest earned on loans, with the balance attributable to higher rates.
Interest expense increased $2,015,000 to $21,334,000 for 1996 from
$19,319,000 for the comparable period in 1995. The increase in interest expense
was substantially due to the higher rate environment.
Interest expense on savings and time deposits increased $567,000 for 1996
to $12,108,000 from $11,541,000 for the comparable 1995 period primarily due to
an increase in the cost of funds. The average rate paid on interest-bearing
deposits rose to 3.66% in 1996 compared to 3.53% in the comparable year ago
period.
Interest expense associated with borrowed funds was $1,448,000 higher when
comparing 1996 to the same period in 1995. The impact of the higher interest
rate environment increased interest expense associated with borrowed funds by
$1,887,000. This increase was partially offset by a reduction in the cost of
funds of $440,000 as a result of lower average borrowings.
Provision For Loan Losses
Reference is made to "Asset Quality" above for information as to management's
continuing evaluation of the loan portfolio and the allowance for loan losses
appropriate thereto. Based on such evaluation, and principally as the result of
the growth in the portfolio, $2,047,000 was provided for possible loan losses
for the year ended December 31, 1996.
Noninterest Income
Noninterest income increased $3,930,000 for 1996 when compared with 1995 as a
result of increased fees from factoring services and mortgage banking services
and higher income from other fee-based services.
Noninterest Expenses
Noninterest expenses increased $5,037,000 for 1996 versus the same period last
year reflecting higher salary and employee benefit costs as well as higher
general business costs and professional fees associated with increased business
development efforts in accordance with a policy of continuing investment in the
company's business franchise.
Provision for Income Taxes
The higher level of pretax profitability resulted in an increase in the
provision for income taxes of $1,596,000 in 1996 when compared to the prior
year.
58
43
STERLING BANCORP AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST EARNINGS[1]
Year Ended December 31, 1997 Year Ended December 31, 1996 Year Ended December 31, 1995
---------------------------- ---------------------------- ----------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
($ in thousands)
Assets
Interest-bearing deposits with
other banks $ 3,285 $ 225 5.68% $ 2,999 $ 157 5.23% $ 3,037 $ 183 5.93%
Investment securities
Available for sale 67,143 4,496 6.70 93,188 6,289 6.75 69,675 4,683 6.72
Held to maturity 236,581 15,903 6.72 228,656 15,034 6.58 234,933 15,349 6.53
Tax-exempt[2] 1,029 48 4.68 113 7 5.97 133 8 6.12
Federal Funds sold 6,718 371 5.52 5,153 289 5.60 9,153 535 5.92
Loans, net of unearned discounts
Domestic[3] 445,479 46,727 11.74 376,090 39,168 11.41 310,330 32,669 10.87
Foreign 789 56 7.12 789 53 6.69 789 57 7.18
--------- --------- --------- --------- --------- ---------
Total Interest-Earning Assets 761,024 67,826 9.44% 706,988 60,997 9.05% 628,050 53,484 8.65%
--------- ====== --------- ====== --------- ======
Cash and due from banks 44,711 40,402 37,178
Allowance for loan losses (8,579) (6,422) (4,765)
Excess cost over equity in net
assets of the bank 21,158 21,158 21,158
Other 20,040 15,569 13,901
--------- --------- ---------
Total Assets $ 838,354 $ 777,695 $ 695,522
========= ========= =========
Liabilities and Shareholders' Equity
Interest-bearing deposits
Domestic
Savings $ 24,288 531 2.18% $ 26,053 535 2.06% $ 28,310 567 2.00%
NOW 35,312 588 1.67 30,703 313 1.02 27,693 287 1.04
Money market 130,742 4,048 3.10 117,822 3,381 2.87 119,470 3,178 2.66
Time 183,997 9,619 5.23 153,231 7,740 5.05 148,849 7,354 4.94
Foreign
Time 2,962 158 5.33 2,711 139 5.14 2,780 155 5.56
Borrowings
Federal funds purchased
and securities sold under
agreements to repurchase 83,207 4,480 5.38 87,092 4,611 5.29 53,295 2,967 5.56
Commercial paper 24,804 1,299 5.24 29,652 1,547 5.22 21,850 1,176 5.38
Other short-term debt 8,221 656 5.19 14,812 1,042 5.27 6,156 316 5.14
Long-term debt 16,385 875 5.89 33,920 2,026 6.76 45,606 3,319 7.28
--------- --------- --------- --------- --------- ---------
Total Interest-Bearing
Liabilities 509,918 22,254 4.32% 495,996 21,334 4.24% 454,009 19,319 4.26%
====== ====== ======
Noninterest-bearing demand
deposits 199,431 -- 175,232 -- 153,244 --
--------- --------- --------- --------- --------- ---------
Total including noninterest-bearing
demand deposits 709,349 22,254 3.10% 671,228 21,334 3.13% 607,253 19,319 3.18%
--------- ====== --------- ====== --------- ======
Other liabilities 46,490 40,699 31,868
--------- --------- ---------
Total Liabilities 755,839 711,927 639,121
Shareholders' equity 82,515 65,768 56,401
--------- --------- ---------
Total Liabilities and
Shareholders' Equity $ 838,354 $ 777,695 $ 695,522
========= ========= =========
Net interest income/spread $ 45,572 5.12% $ 39,663 4.81% $ 34,165 4.39%
========= ====== ========= ====== ========= ======
Net yield on interest earning assets 6.38% 5.93% 5.52%
====== ====== ======
[1] The average balances of assets, liabilities and shareholders' equity are
computed on the basis of daily averages for the bank and monthly averages
for the parent company and its finance subsidiaries.
[2] Interest on these securities is not presented on a tax equivalent basis.
[3] Non-accrual loans are included in the average balance which reduces the
average yields.
59
44
STERLING BANCORP AND SUBSIDIARIES
RATE/VOLUME ANALYSIS
December 31, 1996 to December 31, 1995 to
Increase (Decrease) from Years Ended, December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------------
Volume Rate Total[1] Volume Rate Total[1]
---------------------------------------------------------------
($ in thousands)
Interest Income
Interest-bearing deposits
with other banks $ 35 $ 33 $ 68 $ (3) $ (23) $ (26)
---------------------------------------------------------------
Investment securities
Available for sale (1,761) (32) (1,793) 1,591 15 1,606
Held to maturity 515 354 869 (401) 86 (315)
Tax-exempt[2] 49 (8) 41 (1) -- (1)
---------------------------------------------------------------
Total (1,197) 314 (883) 1,189 101 1,290
---------------------------------------------------------------
Federal funds sold 86 (4) 82 (226) (20) (246)
---------------------------------------------------------------
Loans, net of unearned discount
Domestic[3] 7,064 495 7,559 6,038 461 6,499
Foreign -- 3 3 -- (4) (4)
---------------------------------------------------------------
Total 7,064 498 7,562 6,038 457 6,495
---------------------------------------------------------------
Total Interest Income $ 5,988 $ 841 $ 6,829 $ 6,998 $ 515 $ 7,513
===============================================================
Interest Expense
Savings and time deposits
Domestic
Savings $ (37) $ 33 $ (4) $ (46) $ 14 $ (32)
NOW 61 214 275 32 (6) 26
Money market 379 288 667 (42) 245 203
Time 1,568 311 1,879 229 157 386
Foreign
Time 13 6 19 (4) (12) (16)
---------------------------------------------------------------
Total 1,984 852 2,836 169 398 567
---------------------------------------------------------------
Borrowings
Federal funds purchased and
securities sold under agreements
to repurchase (214) 83 (131) 1,840 (196) 1,644
Commercial paper (256) 8 (248) 415 (44) 371
Other short-term debt (362) (24) (386) 582 144 726
Long-term debt (1,023) (128) (1,151) (949) (344) (1,293)
---------------------------------------------------------------
Total (1,855) (61) (1,916) 1,888 (440) 1,448
---------------------------------------------------------------
Total Interest Expense $ 129 $ 791 $ 920 $ 2,057 $ (42) $ 2,015
===============================================================
Net Interest Income $ 5,859 $ 50 $ 5,909 $ 4,941 $ 557 $ 5,498
===============================================================
[1] The rate/volume variance is allocated equally between changes in volume
and rate. The effect of the extra day in 1996 has been included in the
change in volume.
[2] Interest on the securities is not calculated on a tax equivalent basis.
[3] Non-accrual loans have been included in the amounts outstanding and income
has been included to the extent earned.
60
45
STERLING BANCORP AND SUBSIDIARIES
INTEREST RATE SENSITIVITY
To mitigate the vulnerability of earnings to changes in interest rates, the
Company manages the repricing characteristics of assets and liabilities in an
attempt to control net interest rate sensitivity. Management attempts to confine
significant rate sensitivity gaps predominantly to repricing intervals of a year
or less so that adjustments can be made quickly. Assets and liabilities with
predetermined repricing dates are classified based on the earliest repricing
period. Based on the interest rate sensitivity analysis shown below, the
Company's net interest income would increase during periods of rising interest
rates and decrease during periods of falling interest rates. Amounts are
presented in thousands.
Repricing Date
------------------------------------------------------------------------------
More than Non
3 months 3 months 1 year to Over Rate
or less to 1 year 5 years 5 years Sensitive Total
- ------------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing deposits
with other banks $ 2,010 $ 1,000 $ -- $ -- $ -- $ 3,010
Investment securities 57,010 25,560 28,171 268,107 6,103 384,951
Federal funds sold -- -- -- -- -- --
Loans, net of
unearned discounts 430,932 21,776 64,945 49,314 (8,485) 558,482
Noninterest-earning assets
and allowance for
loan losses -- -- -- -- 73,537 73,537
------------------------------------------------------------------------------
Total Assets 489,952 48,336 93,116 317,421 71,155 1,019,980
------------------------------------------------------------------------------
Liabilities and
Shareholders' Equity
Interest-bearing deposits
Savings[1] -- -- 24,856 -- -- 24,856
NOW[1] -- -- 54,056 -- -- 54,056
Money market[1] 110,883 -- 25,186 -- -- 136,069
Time-domestic 88,658 87,580 25,017 -- -- 201,255
-foreign 1,580 1,130 -- -- -- 2,710
Securities sold under
agreements to repurchase 99,253 7,500 -- -- -- 106,753
Commercial paper 24,071 -- -- -- -- 24,071
Other short-term borrowings 7,391 12,500 -- -- -- 19,891
Other long-term borrowings
--FHLB -- -- 1,400 350 -- 1,750
Noninterest-bearing liabilities
and shareholders' equity -- -- -- -- 448,569 448,569
------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity 331,836 108,710 130,515 350 448,569 1,019,980
------------------------------------------------------------------------------
Net Interest Rate
Sensitivity Gap $ 158,116 $ (60,374) $ (37,399) $ 317,071 $ (377,414) $ --
==============================================================================
Cumulative Gap at
December 31, 1997 $ 158,116 $ 97,742 $ 60,343 $ 377,414 $ -- $ --
==============================================================================
Cumulative Gap at
December 31, 1996 $ 67,266 $ 20,475 $ (11,245) $ 261,380 $ -- $ --
==============================================================================
Cumulative Gap at
December 31, 1995 $ 76,612 $ 53,606 $ 23,820 $ 256,359 $ -- $ --
==============================================================================
[1] Historically, balances on non-maturity deposit accounts have remained
relatively stable despite changes in levels of interest rates. Balances
are shown in repricing periods based on management's historical repricing
practices and runoff experience.
61
46
DIRECTORS
Joseph M. Adamko
Vice Chairman; former Managing
Director, Manufacturers Hanover
Trust Company (now Chase
Manhattan Bank)
Lillian Berkman
President and Chief Executive
Officer, General Alarm Corporation
Louis J. Cappelli
Chairman and Chief Executive
Officer of the Company; Chairman
of Sterling National Bank
Walter Feldesman
Counsel, Baer Marks & Upham
Dr. Allan F. Hershfield
Senior Advisor to the Board of
Trustees, Fashion Institute of
Technology
Henry J. Humphreys
Executive Director, Chancellor
and Chief Operating Officer,
American Association of the
Sovereign Military Order of Malta
John C. Millman
President of the Company;
President and Chief Executive
Officer of Sterling National Bank
Hon. Maxwell M. Rabb
Counsel, Kramer, Levin, Naftalis,
& Frankel; former United States
Ambassador to Italy
Hon. Eugene T. Rossides
Senior Counsel, Rogers & Wells;
former Assistant Secretary,
United States Treasury Department
William C. Warren
Of Counsel, Roberts & Holland;
Dean Emeritus, Columbia University
School of Law
STERLING BANCORP OFFICERS
Louis J. Cappelli
Chairman and Chief Executive
Officer
John C. Millman
President
Jerrold Gilbert
Executive Vice President, General
Counsel & Secretary
John W. Tietjen
Executive Vice President, Treasurer
and Chief Financial Officer
John A. Aloisio
Vice President
Joseph J. Cicero
Vice President and Controller
Salvatore V. Colonna
Vice President
Leonard Rudolph
Vice President
STERLING NATIONAL BANK
OFFICERS
Louis J. Cappelli
Chairman
John C. Millman
President and Chief Executive
Officer
Executive Vice Presidents
John A. Aloisio
Salvatore V. Colonna
Jerrold Gilbert
Edward Lieberstein
Leonard Rudolph
John W. Tietjen
Senior Vice Presidents
Howard M. Applebaum
Michael Bizenov
David Drucker
Michael N. Gallina
Barry J. Horowitz
Robert L. Krause
Harvey Leibowitz
John P. Murphy
Stanley Officina
Tamar Spilo
Administrative Vice Presidents
Scott E. Bass
Elizabeth R. DeBaro
Herman J. Furletti
Thomas P. McGevna
Joseph W. Malyska
Willis W. Martin
Joel M. Schprechman
Vice Presidents
Frank B. Amendolare
Jonathan Brand
William B. Bower
Stanley P. Chabinsky
Raymond J. Chretien
Joseph J. Cicero
Joseph F. Conti
Salvatore F. Costa
Norka Del Rios
Marvin A. Factor
Elizabeth R. Forgione
Robert J. Formica
Thomas M. Frankel
John C. Gallo
John Goonan
Anthony M. Grosso
Leonard Hook
Larry J. Kamin
Christopher M. Kirmales
Pearl J. Kong
Charles R. Korany
John Kourkoutis
Joseph C. LoMonaco
Joseph V. McGee
Kenneth J. Marte
Richard Miller
Arthur F. Murray
Vincent O'Hare
Steven A. Orenstein
Eileen K. Rada
Barbara A. Riordan
John A. Rosado
Samuel L. Santapaola
Michael J. Scheller
Renee M. Singer
David Sorokin
Carol H. Treventi
Morris A. Weiss
Bernard E. Werblow
Clifford C. Zakre
Bernard Zatz
Deputy General Counsel
Lesley Goldberg
- --------------------------------------------------------------------------------
STERLING NATIONAL BANK
BUSINESS ADVISORY BOARD
Ben Evans
Financial Consultant
Bernard Friedman
President, Penmark Realty Co.
- --------------
Senior Advisor
Hon. Abraham D. Beame
Steven E. Fochios, M.D.
Chief, Division of Medicine
Manhattan Eye, Ear &
Throat Hospital
Ronald Koenig
Chairman, Capital Growth
International, L.L.C.
Kenneth S. Lazar
President, Lazar Consulting
Associates, Inc.
Henry J. Manns
Vice President & General Credit
Manager, Milliken & Company
Charles C. Marino
President, AMCC Corp.
Fred Menowitz
Real Estate Investor
Jack Weksler
President, Bruce Supply Corp.
62